[Federal Register Volume 84, Number 153 (Thursday, August 8, 2019)]
[Notices]
[Pages 39025-39028]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-16939]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86554; File No. SR-DTC-2019-005]
Self-Regulatory Organizations; The Depository Trust Company;
Notice of Filing of Proposed Rule Change To Amend the Settlement Guide
To Implement a New Algorithm for Transactions Processed in the Night
Cycle
August 2, 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 July 22, 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. 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.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The proposed rule change \3\ of DTC consists of amendments to the
Procedures \4\ set forth in the Settlement Guide \5\ to implement a new
processing algorithm for book-entry Deliveries \6\ and Payment Orders
\7\ processed in the DTC night cycle (``Night Cycle''), as described in
greater detail below.
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\3\ Capitalized terms not defined herein are defined in the
Rules, By-Laws and Organization Certificate of DTC (``Rules''),
available at www.dtcc.com/~/media/Files/Downloads/legal/rules/
dtc_rules.pdf, and the DTC Settlement Service Guide (``Settlement
Guide''), available at http://www.dtcc.com/~/media/Files/Downloads/
legal/service-guides/Settlement.pdf.
\4\ Pursuant to the Rules, the term ``Procedures'' means the
Procedures, service guides, and regulations of DTC adopted pursuant
to Rule 27, as amended from time to time. See Rule 1, Section 1,
supra note 3. Pursuant to Rule 27, each Participant and DTC is bound
by the Procedures and any amendment thereto in the same manner as it
is bound by the Rules. See Rule 27, supra note 3.
\5\ Supra note 3.
\6\ Pursuant to Rule 1, the term ``Delivery'' as used with
respect to a Security held in the form of a Security Entitlement on
the books of DTC, means debiting the Security from an Account of the
Deliverer and crediting the Security to an Account of the Receiver.
Supra note 3.
\7\ Pursuant to the Settlement Guide, ``Payment Order'' means a
transaction in which a Participant charges another Participant for
changes in value for outstanding stock loans or option contract
premiums. See Settlement Guide, supra note 3, at 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 purpose of this proposed rule change is to amend the Settlement
Guide to implement a new processing algorithm for Deliveries and
Payment Orders processed in the Night Cycle.
(i) Background
Pursuant to the proposed rule change, DTC is proposing to make
enhancements to its processing of transactions in the Night Cycle
(``Night Cycle Reengineering''), as more fully described below. Night
Cycle Reengineering is designed to maximize transaction throughput by
optimizing available positions and controlling the order in which
transactions are attempted for settlement within existing Night Cycle
timeframes. The reengineered Night Cycle would introduce a new,
advanced settlement processing algorithm capable of evaluating each
Participant's transaction obligations, available positions, transaction
priorities and risk management controls, including Net Debit Cap and
Collateral Monitor,\8\ to identify the transaction processing order
that maximizes Night Cycle settlement rates. DTC believes that the
proposed rule change would facilitate more efficient processing of
Deliveries and Payment Orders in the Night Cycle and increase the
percentage of transactions that have been processed for settlement
[[Page 39026]]
prior to the start of regular daytime processing.
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\8\ In managing its credit risk, DTC uses the Collateral Monitor
and Net Debit Cap. These two controls work together to protect the
DTC settlement system in the event of Participant default. The
Collateral Monitor requires net debit settlement obligations, as
they accrue intraday, to be fully collateralized; the Net Debit Cap
limits the amount of any Participant's net debit settlement
obligation to an amount that can be satisfied with DTC liquidity
resources (the Participants Fund and the committed line of credit
from a consortium of lenders). See Settlement Guide, supra note 3,
at 64-67.
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DTC Transaction Processing
When a Deliver Order \9\ or Payment Order has been submitted to DTC
for processing, the transaction must be approved by the Receiver
through the Receiver Authorized Delivery function (``RAD''), before it
will be staged for DTC settlement processing in accordance with the
Rules and the Settlement Guide.\10\ After a Receiver approves a
Delivery or Payment Order using RAD, DTC checks risk controls,
including the Net Debit Cap and Collateral Monitor of the Participants
to the transaction.\11\ DTC also checks whether or not the Participant
that would make the Delivery has a sufficient position in the subject
Securities available in the Participant's Account.\12\ If a transaction
satisfies DTC risk controls, namely the Net Debit Cap and Collateral
Monitor, and the Delivering Participant has sufficient position in the
applicable Securities, then the transaction will be processed by DTC
and will become complete if the Receiver satisfies its end-of-day funds
settlement obligation.\13\ If a transaction is not processed, i.e.,
because DTC risk controls are not met, or if the Deliverer has
insufficient position in the applicable Securities, this would result
in an Exception such that the transaction will pend in DTC's system and
recycle until the condition causing the pend is satisfied.\14\
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\9\ Pursuant to the Settlement Guide, ``Deliver Order'' is the
term used to define a book-entry movement of shares of a particular
Security between two DTC Participants. See Settlement Guide, supra
note 3, at 4. DTC acts in accordance with duly authorized
instructions from a Participant to effect transfers by a Participant
of its Deposited Securities to another Participant or Participants.
See Rule 6, supra note 3. Any Participant making a Delivery Versus
Payment of Securities through the facilities of DTC shall provide
DTC with an instruction specifying the amount of the payment
therefor in accordance with the Procedures. After receipt of such
instruction, DTC is authorized to, and shall (subject to the right
of DTC to cease to act for a Participant pursuant to the Rules and
the Procedures), credit the Account of the Deliverer with the amount
specified and debit the Account of the Receiver with the same
amount. See Rule 9(A), Section 1, supra note 3.
\10\ RAD allows Participants to review and either approve or
reject incoming Deliveries before they are processed. See Settlement
Guide, supra note 3, at 53. RAD limits a Participant's exposure from
misdirected or erroneously entered transactions. See Settlement
Guide, supra note 3, at 5.
\11\ See Settlement Guide, supra note 3, at 64-68.
\12\ See Settlement Guide, supra note 3, at 55.
\13\ See Rules 9(A) and 9(B), supra note 3.
\14\ See Settlement Guide, supra note 3, at 55.
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An incomplete transaction recycles in DTC's system until the end of
the day, and if it remains incomplete at the end of the day it will not
be processed, will be removed from processing and will not settle.\15\
If the Participants to the transaction wish to settle the transaction
through DTC, it will need to be resubmitted.
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\15\ Id.
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DTC currently processes transactions in real-time from
approximately 8:30 p.m. Eastern Time (``ET'') on the night before
settlement day until 3:30 p.m. ET on settlement day for valued
transactions and until 6:35 p.m. ET for free transactions.\16\ The
Night Cycle starts at approximately 8:30 p.m. ET on the Business Day
prior to settlement date and runs until approximately 10 p.m. ET each
Business Day. Transactions that cannot satisfy DTC's controls at the
time they are introduced to DTC will recycle throughout the day and be
continuously reattempted until approximately 3:10 p.m. for valued
transactions, and 6:35 p.m. for free transactions.\17\ Transactions
that satisfy DTC's controls are processed immediately as described
above. The end-of-day settlement process for valued transactions
typically concludes between approximately 4 p.m. and 4:30 p.m.\18\
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\16\ Valued transactions are processed as Deliveries Versus
Payment, as defined in Rule 1, supra note 3, with the related
payments settled through end-of-day settlement. Free transactions do
not have an associated payment. Processing of valued transactions
must be completed earlier on settlement date than free transactions
so that DTC can settle the related payments of funds in accordance
with established timeframes for the DTC end-of-day settlement
process as set forth in the Settlement Guide. See Settlement Guide,
supra note 3, at 17-20. In accordance with the Settlement Processing
Schedule, valued transactions must be approved in RAD by the
Receiver by 3:30 p.m. ET. Any valued transactions not approved by
the Receiver by this time are removed from the system. See
Settlement Guide, supra note 3, at 24-27.
\17\ Certain Participants manage their securities inventory by
controlling when securities transactions are submitted to DTC for
processing, i.e., they may hold off submitting outgoing transactions
(deliveries) until incoming transactions (receives) are processed.
The window between 3:10 p.m. ET and 3:30 p.m. ET provides such
Participants with an opportunity to react to receive transactions
and submit applicable delivery transactions. The cutoff for all
valued transactions is 3:30 p.m. ET, which allows DTC to calculate
final settlement balances and complete end of day funds settlement.
Free transactions are allowed to recycle until 6:35 p.m. ET since
many free transactions are blocked intraday by the Collateral
Monitor until end of day funds settlement is complete and the
Collateral Monitor controls are ``released.'' See Settlement Guide,
supra note 3, at 24-27.
\18\ See Settlement Guide, supra note 3, at 17-20.
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Proposed Night Cycle Reengineering Processing Rules
Other than a limited look-ahead process as described below, DTC
does not employ a processing mechanism that is designed to proactively
optimize the percentage of available transactions that are processed
for settlement on settlement date. As described below, DTC proposes to
implement a process that would facilitate a higher percentage of
available transactions being processed for settlement during the Night
Cycle.\19\
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\19\ Approximately 50 percent of transactions available for
processing at the start of the Night Cycle are processed for
settlement during the Night Cycle. DTC anticipates that the proposal
would increase the percentage of transactions processed for
settlement during the Night Cycle to approximately 65 percent.
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Pursuant to the proposed rule change, DTC would introduce an
algorithm that would test multiple scenarios that would incorporate all
transactions available for processing at the start of the Night Cycle
as a single batch (``Night Batch Process''), to determine the order of
processing of those transactions that allows for the optimal percentage
of the transactions to satisfy risk and position controls (i.e., the
Collateral Monitor and Net Debit Cap controls), and therefore be
processed for settlement in the Night Cycle. Consistent with DTC's
existing processing environment, the scenarios used would only involve
processing of the transactions on a bilateral basis (i.e., no netting
of Deliveries).\20\ Once the optimal order of processing has been
identified, the results reflecting this optimal processing order would
be incorporated into DTC's core processing environment on a
transaction-by-transaction basis, and member output would be produced
using existing DTC output facilities. Delivery instructions provided to
DTC after the Night Batch Process has begun would be submitted for
daytime processing.
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\20\ The proposed rule change relates only to the processing
order of Deliveries and does not impact DTC's funds settlement
process, by which associated funds debits and credits in the
Participant's settlement account are netted intraday to calculate,
at any time, a net debit balance or net credit balance, resulting in
an end-of-day settlement obligation or right to receive payment.
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Inventory Management System Submission Order
Participants can use a profile in the Inventory Management System
(``IMS'') that allows them to define the order in which their
transactions get submitted for processing during the Night Cycle.\21\
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\21\ See Securities Exchange Act Release No. 52450 (September
15, 2005), 70 FR 55641 (September 22, 2005) (File No. SR-DTC-2005-
07) and Securities Exchange Act Release No. 50944 (December 29,
2004), 70 FR 1927 (January 11, 2005) (File No. SR-DTC-2004-10).
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Specifically, IMS provides Participants with two (2) different
types of transaction ordering: Submission ordering and recycle
ordering. The submission ordering allows Participants to control the
order in which different transaction types are submitted into DTC's
core processing system. The
[[Page 39027]]
submission order functionality allows Participants to prioritize
transactions by transaction types. The recycle ordering allows
Participants to control how DTC attempts to process recycling, or
pending, transactions. Similar to the submission ordering, Participants
can also prioritize transactions by transaction types under recycle
ordering. Additionally, Participants can instruct DTC to (i) attempt
transactions in the defined order but complete any transaction that can
be completed, (ii) only complete transactions in the defined order, or
(iii) not complete any transactions until instructed to do so.
Because the proposed Night Batch Process would attempt to maximize
settlement regardless of transaction type, the IMS profile would become
obsolete with respect to transactions processed in the Night Cycle.
Look-Ahead Processing
Pursuant to the Settlement Guide, DTC's look-ahead process (``Look-
Ahead Process'') runs throughout the processing day at fifteen-minute
intervals and selects pairs of transactions that when processed
simultaneously will not violate the involved Participants' Net Debit
Cap, Collateral Monitor and other risk management system controls.\22\
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\22\ See Settlement Guide, supra note 3, at 43.
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The Look-Ahead Process reduces transaction blockage for Securities
by identifying a receive transaction pending due to a Net Debit Cap
insufficiency, and determines whether the processing of an offsetting
delivery transaction pending because of a quantity deficiency in the
same Security would permit both transactions to be completed in
compliance with DTC's risk management system controls.\23\ DTC's
processing system calculates the net effect to the Collateral Monitor
and Net Debit Cap controls for all three Participants involved and if
the net effect will not result in a deficit in the Collateral Monitor
or Net Debit Cap for any of the three Participants, the system
processes the transactions simultaneously.\24\
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\23\ Id.
\24\ Id.
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Pursuant to the proposed rule change, because the Night Batch
Process would provide an algorithm to maximize settlement for all
transactions processed in the Night Cycle, the Look-Ahead Process would
become obsolete for Night Cycle processing and would not be utilized
for processing of transactions in the Night Batch Process.
(ii) Proposed Rule Changes
Pursuant to the proposed rule change, DTC would add a section to
the Settlement Guide titled ``Batch Processing'' that would set forth
the following text:
During the Night Batch Process, DTC evaluates each Participant's
available positions, transaction priority and risk management controls
and identifies the transaction processing order that optimizes the
number of transactions processed for settlement. The Night Batch
Process allows DTC to run multiple processing scenarios until it
identifies an optimal processing scenario.
At approximately 8:30 p.m. on S-1, DTC will subject all
transactions eligible for processing to the Night Batch Process. The
Night Batch Process will be run in an ``off-line'' batch that will not
be visible to Participants, allowing DTC to run multiple processing
scenarios until the optimal processing scenario is identified. Once the
optimal scenario is identified, the results of the Night Batch Process
will be incorporated back into DTC's core processing environment on a
transaction-by-transaction basis, and Participant output will be
produced using existing DTC output facilities.
In addition, the proposed rule change would add a definition for
the Night Batch Process to the Settlement Guide to state that it is a
process that operates to control the order of processing of
transactions in the Night Cycle.
The proposed rule change would also add a sentence to the section
of the Settlement Guide describing the Look-Ahead Process to state that
the Look-Ahead Process would not be utilized during the Night Batch
Process.
As described above, the IMS profile that allows Participants to
define the order in which their transactions get submitted for
settlement during the Night Cycle would become obsolete. DTC's
Procedures relating to the implementation of rule changes relating to
this profile were set forth in two DTC Important Notices \25\ (``IMS
Important Notices'') that were included in the applicable rule filings
cited above,\26\ and these Procedures were not added to the text of any
other DTC Rule or Procedure, including the Rules and Settlement Guide.
Therefore, no amendment to the text of the Rules or a service guide is
proposed with respect to the proposed rule change relating to this IMS
profile. DTC would describe the proposed change relating to IMS in an
Important Notice issued at the time of implementation of the proposed
rule change with a citation to the two IMS Important Notices, cited
above.
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\25\ See DTC Important Notice No. B#6329 (September 7, 2004) and
DTC Important Notice No. B#7594 (April 25, 2005).
\26\ See supra note 21.
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(iii) Participant Outreach
Beginning in March 2018, DTC has conducted ongoing outreach with
Participants to provide them with 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.
(iv) Implementation Timeframe
Pending Commission approval, DTC expects to implement this proposal
by September 26, 2019 and would announce the effective date of the
proposed change by an Important Notice posted to its website. As
proposed, a legend would be added to the Settlement Guide stating there
are changes that have been approved by the Commission but have not yet
been implemented. The proposed legend also would include a date by
which such changes would be implemented and the file number of this
proposal, and state that, once this proposal is implemented, the legend
would automatically be removed from the Settlement Guide.
2. Statutory Basis
DTC believes this proposal is consistent with the requirements of
the Act and the rules and regulations thereunder applicable to a
registered clearing agency. Specifically, DTC believes this proposal is
consistent with Section 17A(b)(3)(F) of the Act \27\ for the reasons
described below.
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\27\ 15 U.S.C. 78q-1(b)(3)(F).
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Section 17A(b)(3)(F) of the Act requires, in part, that the Rules
be designed to promote the prompt and accurate clearance and settlement
of Securities transactions.\28\ DTC believes that the proposed changes
to implement the Night Batch Process, which would test the entire batch
of transactions available for processing at the start of the Night
Batch Process to determine the optimal order to process transactions in
the Night Cycle, such that they may satisfy risk and position controls,
would help maximize the number of transactions processed for settlement
during the Night Cycle. Therefore, DTC believes that the proposed
changes to implement the Night Batch Process would promote the prompt
and accurate clearance and settlement of Securities transactions,
[[Page 39028]]
consistent with Section 17A(b)(3)(F) of the Act.
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\28\ Id.
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(B) Clearing Agency's Statement on Burden on Competition
DTC believes the proposed changes could burden competition. This is
because by implementing the Night Batch Process, Participants would no
longer be able to use IMS to direct the prioritization of the
processing of their transactions in the Night Cycle. DTC does not
believe any burden on competition presented by the proposal would be
significant, because the benefit that would be realized from the
processing of a higher percentage of transactions during the Night
Cycle through the optimized process described above would offset the
burden of a Participant not being able to determine the order of
processing on its own, and therefore render as insignificant any
residual burden of a Participant no longer being able to use IMS to
direct prioritization of transactions.
DTC believes any burden on competition that is created by these
proposed changes would be necessary and appropriate in furtherance of
the purposes of the Act, as permitted by Section 17A(b)(3)(I) of the
Act.\29\
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\29\ 15 U.S.C. 78q-1(b)(3)(I).
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The proposed changes to implement the Night Batch Process would be
necessary in furtherance of the purposes of the Act because the Rules
must be designed to promote the prompt and accurate clearance and
settlement of Securities transactions.\30\ As described above, DTC
believes that the proposed changes would promote the prompt and
accurate clearance and settlement of Securities transactions by
maximizing the number of settled transactions during the Night Cycle.
As such, DTC believes these proposed changes would be necessary in
furtherance of the purposes of the Act, as permitted by Section
17A(b)(3)(I) of the Act.\31\
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\30\ 15 U.S.C. 78q-1(b)(3)(F).
\31\ 15 U.S.C. 78q-1(b)(3)(I).
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DTC believes any burden on competition that is created by the
proposed changes to implement the Night Batch Process would also be
appropriate in furtherance of the purposes of the Act. The proposed
changes would enable DTC to optimize the available Securities positions
and their settlement order. Having the ability to optimize the
available Securities positions and their settlement order would help
DTC to maximize the number of settled transactions during the Night
Cycle. As such, DTC believes these proposed changes would be
appropriate in furtherance of the purposes of the Act, as permitted by
Section 17A(b)(3)(I) of the Act.\32\
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\32\ Id.
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(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants, or Others
Written comments relating to this proposed rule change have not
been solicited or received. DTC will notify the Commission of any
written comments received by DTC.
III. Date of Effectiveness of the Proposed Rule Change, and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
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-2019-005 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-2019-005. 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-2019-005 and should be submitted on
or before August 29, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\33\
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\33\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-16939 Filed 8-7-19; 8:45 am]
BILLING CODE 8011-01-P