[Federal Register Volume 85, Number 220 (Friday, November 13, 2020)]
[Notices]
[Pages 72708-72711]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-25060]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90372; File No. SR-DTC-2020-011]


Self-Regulatory Organizations; The Depository Trust Company; 
Order Approving a Proposed Rule Change To Amend Rule 4

November 6, 2020

I. Introduction

    On September 9, 2020, The Depository Trust Company (``DTC'') filed 
with the Securities and Exchange

[[Page 72709]]

Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ proposed rule change SR-DTC-2020-011. The proposed rule 
change was published for comment in the Federal Register on September 
28, 2020.\3\ The Commission did not receive any comment letters on the 
proposed rule change. For the reasons discussed below, the Commission 
is approving the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 89952 (September 22, 
2020), 85 FR 60847 (September 28, 2020) (SR-DTC-2020-011) 
(``Notice'').
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II. Description of the Proposed Rule Change

A. Background

    DTC is the central securities depository (``CSD'') for 
substantially all corporate and municipal debt and equity securities 
available for trading in the United States.\4\ As a covered clearing 
agency that provides CSD services,\5\ DTC provides a central location 
in which securities may be immobilized, and interests in those 
securities are reflected in accounts maintained for its Participants, 
which are financial institutions such as brokers or banks.\6\ DTC does 
not provide central counterparty services and therefore does not become 
party to its Participants' transactions or guarantee settlement on 
behalf of its Participants.\7\
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    \4\ Each capitalized term not otherwise defined herein has its 
respective meaning as set forth in DTC's rules, including, but not 
limited to, the Rules, By-Laws and Organization Certificate of DTC 
(the ``Rules'') and the DTC Settlement Service Guide (the 
``Settlement Guide''), available at http://www.dtcc.com/legal/rules-and-procedures.aspx. The Settlement Guide is a Procedure of DTC 
filed with the Commission that, among other things, operationalizes 
and supplements the DTC Rules that relate to settlement.
    \5\ A covered clearing agency is defined as a registered 
clearing agency that provides the services of a central counterparty 
(``CCP'') or CSD. See 17 CFR 240.17Ad-22(a)(5). CSD services means 
services of a clearing agency that is a securities depository as 
described in Section 3(a)(23)(A) of the Exchange Act. See 17 CFR 
240.17Ad-22(a)(3). Specifically, the definition of a clearing agency 
includes, in part, ``any person, such as a securities depository 
that (i) acts as a custodian of securities in connection with a 
system for the central handling of securities whereby all securities 
of a particular class or series of any issuer deposited within the 
system are treated as fungible and may be transferred, loaned, or 
pledged by bookkeeping entry without physical delivery of securities 
certificates, or (ii) otherwise permits or facilitates the 
settlement of securities transactions or the hypothecation or 
lending of securities without physical delivery of securities 
certificates.'' 15 U.S.C. 78c(a)(23)(A).
    \6\ See, e.g., Securities Exchange Act Release No. 20221 
(September 23, 1983), 48 FR 45167, 45168 (October 3, 1983) (File No. 
600-1) (``A securities depository is a ``custodial'' clearing agency 
that operates a centralized system for the handling of securities 
certificates. Depositories accept deposits of securities from 
broker-dealers, banks, and other financial institutions; credit 
those securities to the depositing participants (sic) accounts; and, 
pursuant to participant's (sic) instructions, effect book-entry 
movements of securities. The physical securities deposited with a 
depository are held in a fungible bulk; each participant or pledgee 
having an interest in securities of a given issue credited to its 
account has a pro rata interest in the physical securities of the 
issue held in custody by the securities depository in its nominee 
name. Depositories collect and pay dividends and interest to 
participants for securities held on deposit. Depositories also 
provide facilities for payment by participants to other participants 
in connection with book-entry deliveries of securities. . . .'').
    \7\ A clearing agency that provides central counterparty 
services interposes itself between the counterparties to securities 
transactions, acting functionally as the buyer to every seller and 
the seller to every buyer. 17 CFR 240.17Ad-22(a)(2).
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    DTC provides settlement services for virtually all broker-to-broker 
equity and listed corporate and municipal debt securities transactions 
in the U.S., as well as institutional trades, money market instruments 
and other financial obligations. For end-of-day net funds settlement, 
the DTC settlement system records money debits and credits to 
Participant settlement accounts throughout a Business Day.\8\ At the 
end of a Business Day, a Participant's settlement account will have a 
net debit (i.e., the sum of all money charges to a Participant's 
account exceeds the sum of all money credits), net credit (i.e., the 
sum of all money credits to a Participant's account exceeds the sum of 
all money charges), or zero balance. This final balance will determine 
whether the Participant has an obligation to pay or to be paid as part 
of the process of DTC completing settlement on that Business Day. A 
Participant that fails to pay its net debit balance and therefore 
defaults on its settlement obligations on a Business Day will not have 
paid for the securities processed for delivery versus payment, and the 
securities will not be credited to its account.
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    \8\ Credits to a Participant settlement account arise from 
deliveries versus payment, receipt of payment orders, principal and 
interest distributions in respect of securities held, intraday 
settlement progress payments and any other items or transactions 
that give rise to a credit. Debits to a Participant settlement 
account are primarily due to receives versus payment, as well as 
other types of charges to the account permitted under the Rules. See 
Notice, supra note 3, 85 FR at 60848.
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    DTC represents that there may be circumstances in which the amount 
of settlement payments received or available to DTC on a Business Day 
is not sufficient to pay all Participants with an end-of-day net credit 
balance on that Business Day (a ``settlement gap'').\9\ A settlement 
gap could occur on a Business Day as a result of a Participant Default, 
where a Participant fails to pay its settlement obligation (a ``default 
gap''). A settlement gap could also occur on a Business Day as a result 
of causes other than a Participant Default (a ``non-default gap''). 
Examples of a non-default gap could include a scenario in which the 
funds required to complete settlement are not available to DTC due to 
an operational or data issue arising at DTC or at a Participant or 
Settling Bank, a cyber incident, or other business disruption.\10\ 
According to DTC, its failure to complete settlement on a given 
Business day could cause significant market-wide effects.\11\
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    \9\ See id.
    \10\ DTC is subject to a number of regulatory requirements 
related to its operational and cyber risks, including Rule 17Ad-
22(e)(17) and Regulation Systems Compliance and Integrity. DTC's 
overall approach to operational risk is summarized in its Disclosure 
Framework, available at https://www.dtcc.com/legal/policy-and-compliance. Among other things, DTC manages its operational risk 
pursuant to the Clearing Agency Operational Risk Management 
Framework, which the Commission approved in a separate rule filing. 
See Securities Exchange Act Release No. 81745 (September 28, 2017), 
82 FR 46332 (October 4, 2017) (SR-DTC-2017-014).
    \11\ See Notice, supra note 3, 85 FR at 60848-49 (citing, e.g., 
Rule 9(B), supra note 4, which states: ``Each Participant and the 
Corporation shall settle the balance of the Settlement Account of 
the Participant on a daily basis in accordance with these Rules and 
the Procedures. Except as provided in the Procedures, the 
Corporation shall not be obligated to make any settlement payments 
to any Participants until the Corporation has received all of the 
settlement payments that Settling Banks and Participants are 
required to make to the Corporation.'').
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B. The Participants Fund and Rule 4

    The Participants Fund is prefunded and represents the aggregate of 
the deposits that each DTC Participant is required to make under DTC's 
Rules.\12\ The Rules provide for a minimum deposit to the Participants 
Fund, and Participants with higher levels of activity that impose 
greater liquidity risk to the DTC settlement system have proportionally 
larger required deposits.\13\ DTC has stated that the Participants Fund 
is a mutualized pre-funded liquidity and loss resource, and that DTC 
does not have an obligation to repay the Participants Fund and the 
application of the Participants Fund does not convert to a loss.\14\ 
Once DTC applies the Participants Fund, the Participants are required, 
upon the demand of DTC, to replenish their shares of the Participants 
Fund to satisfy

[[Page 72710]]

their minimum deposits.\15\ DTC further represents that the principal 
purpose of the Participants Fund is to be one of the foundational 
liquidity resources available to DTC to fund a shortfall in order to 
complete settlement on a Business Day.\16\
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    \12\ See Rule 4 (Participants Fund and Participants Investment), 
supra note 4.
    \13\ See id.
    \14\ Securities Exchange Act Release No. 83950 (August 27, 
2018), 83 FR 44393 (August 30, 2018) (SR-DTC-2017-804).
    \15\ See Section 4 of Rule 4 (Participants Fund and Participants 
Investment), supra note 4.
    \16\ See Notice, supra note 3, 85 FR at 60849 (citing DTC's 
Settlement Guide which provides that the Participants Fund creates 
liquidity and collateral resources to support the business of DTC 
and to cover losses and liabilities incident to that business).
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    Currently, Section 4 of Rule 4 provides that, if there is a 
Defaulting Participant and the amount charged to the Actual 
Participants Fund Deposit of the Defaulting Participant pursuant to 
Section 3 of Rule 4 \17\ is not sufficient to complete settlement, DTC 
may apply the Actual Participants Fund Deposits of Participants other 
than the Defaulting Participant (each, a ``non-defaulting 
Participant''), and apply such other liquidity resources as may be 
available to DTC, including, but not limited to, the End-of-Day Credit 
Facility.\18\ DTC recognizes that currently, certain provisions of Rule 
4 might be construed to narrow the scope of use of the Participants 
Fund (and any other liquidity resources) for settlement to a default 
gap only.\19\ In order to ensure that DTC may use the Participants Fund 
and other liquidity resources to fund a settlement gap regardless of 
its cause, DTC has proposed revising Rule 4, as discussed below.
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    \17\ Section 3 of Rule 4 provides that if a Participant is 
obligated to DTC pursuant to the Rules and the Procedures and fails 
to satisfy any such obligation, DTC shall, to the extent necessary 
to eliminate such obligation, apply some or all of the Actual 
Participants Fund Deposit of such Participant to such obligation to 
satisfy the Participant Default. See Section 3 of Rule 4, supra note 
4.
    \18\ Section 2 of Rule 4 provides that ``End-of-Day Credit 
Facility'' is any credit facility maintained by DTC for the purpose 
of funding the end-of-day settlement of transactions processed 
through the facilities of DTC. See Section 2 of Rule 4, supra note 
4. Also see Securities Exchange Act Release No. 80605 (May 5, 2017), 
82 FR 21850 (May 10, 2017) (SR-DTC-2017-802; NSCC-2017-802) 
(renewing the committed revolving credit facility of DTC and 
National Securities Clearing Corporation).
    \19\ See Notice, supra note 3, 85 FR at 60852.
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C. Description of Proposed Changes

    DTC states that Section 4 of Rule 4 does not address the use of the 
Participants Fund to complete settlement when there is a non-default 
gap and could be construed as limiting the pro rata application of the 
Participants Fund to fund a settlement gap to default scenarios.\20\ 
DTC further represents that, on each Business Day, settlement occurs 
during a tight timeframe, in conjunction with the Federal Reserve's 
National Settlement Service and Fedwire.\21\ If there is a delay with 
the receipt or disbursement of funds for settlement, DTC would need to 
address those problems quickly in order to complete settlement on that 
Business Day.\22\
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    \20\ See Notice, supra note 3, 85 FR at 60850.
    \21\ See id.; see also, Settlement Guide at 19-20, supra note 4.
    \22\ See Notice, supra note 3, 85 FR at 60849.
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    In the Notice, DTC describes the proposed changes to address this 
situation and expressly ensure that the Participants Fund could be used 
to complete settlement in the event of a non-default gap. First, DTC 
proposes to amend Section 4 of Rule 4 to state that (i) the 
Participants Fund, (ii) the existing retained earnings or undivided 
profits of DTC, and (iii) any other liquidity resources as may be 
available (including, but not limited to, the End-of-Day Credit 
Facility), would be available to DTC as liquidity resources to fund 
settlement on a Business Day, regardless of whether the settlement gap 
is a default gap or a non-default gap. The proposal would state that 
DTC may apply its available resources to fund settlement, in such order 
and in such amounts as it determines, in its sole discretion. Second, 
DTC proposes to provide that a determination to apply the Participants 
Fund shall be made by either the Chief Executive Officer, Chief Risk 
Officer, Chief Financial Officer, a member of any management committee, 
Treasurer or any Managing Director as may be designated by the Chief 
Risk Officer from time to time. The proposal also states that the Board 
of Directors (or an authorized Committee thereof) shall be promptly 
informed of the determination.\23\ Third, DTC proposes to make certain 
clarifying and conforming changes, including to clarify that a 
Participant's pro rata share of an application of the Participants Fund 
would be the same whether there is a default gap or a non-default gap, 
and to make minor changes for conformity and readability.
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    \23\ The requirement that DTC would also promptly notify the 
Commission in the event that the Participants Fund were used to 
complete settlement would remain unchanged.
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III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \24\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Act and rules and regulations thereunder applicable 
to such organization. After carefully considering the proposed rule 
change, the Commission finds that the proposed rule change is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to DTC. In particular, the Commission 
finds that the proposed rule change is consistent with Section 
17A(b)(3)(F) of the Act and Rules 17Ad-22(e)(1) and (e)(2)(i) 
promulgated under the Act,\25\ for the reasons described below.
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    \24\ 15 U.S.C. 78s(b)(2)(C).
    \25\ 15 U.S.C. 78q-1(b)(3)(F); 17 CFR 240.17Ad-22(e)(1) and 
(e)(2)(i).
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A. Consistency With Section 17A(b)(3)(F)

    Section 17A(b)(3)(F) of the Act requires, in part, that the rules 
of a clearing agency, such as DTC, be designed to promote the prompt 
and accurate clearance and settlement of securities transactions.\26\
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    \26\ Id.
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    DTC proposes to amend Section 4 of Rule 4 to provide expressly for 
the pro rata application of the Participants Fund, retained earnings, 
and any other liquidity resources, including DTC's credit facility, to 
any settlement gap, including a non-default gap. As noted above, 
settlement occurs during a tight timeframe on each Business Day. If 
there is a delay with the receipt or disbursement of funds for 
settlement, it would need to be addressed quickly in order to complete 
settlement on that Business Day. The proposal would clarify which 
resources DTC can access and use in the most time-efficient and 
effective manner to ensure settlement.\27\ The proposal is designed to 
allow DTC to take timely and effective action to fund a settlement gap, 
regardless of whether it is a default or non-default gap, and therefore 
complete settlement, by identifying and applying appropriate liquidity 
resources, which is consistent with the promotion of robust risk 
management. By improving DTC's ability take timely action to fund a 
settlement gap and, thereby, reducing DTC's settlement risk at the end 
of a Business Day, the Commission believes that DTC should improve 
DTC's ability to provide prompt and accurate clearance and settlement 
of securities

[[Page 72711]]

transactions that are processed and settled through DTC's system.
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    \27\ The Commission further believes that use of the 
Participants Fund may be the most efficient method of completing 
settlement at the end of a Business Day on a tight timeframe, as it 
generally consists of cash which, pursuant to DTC's Investment 
Policy, must be held in demand deposit, savings or checking bank 
accounts that provide same day access to funds. See Exchange Act 
Release No. 88513 (March 30, 2020), 85 FR 19047, 19048 (April 3, 
2020). The Commission observes that, as a general matter, it likely 
could take more time to access retained earnings or draw down on the 
credit facility.
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    The proposal would also make other clarifying and conforming 
changes to provide enhanced transparency with respect to use of the 
Participants Fund and other resources for settlement. Further, the 
proposal would specify the particular DTC personnel whose approval 
could authorize the use of the Participants Fund to finance a 
settlement gap. By making such changes, the Commission believes that 
the proposal is designed to provide clear and consistent Rules, by 
expressly addressing the scope and manner of DTC's use of the 
Participants Fund and other available resources to complete settlement 
on a given Business Day, thereby allowing DTC to provide prompt and 
accurate clearance and settlement of securities transactions.

B. Consistency With Rule 17Ad-22(e)(1)

    Rule 17Ad-22(e)(1) under the Act requires that DTC establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to provide for a well-founded, clear, transparent, 
and enforceable legal basis for each aspect of its activities in all 
relevant jurisdictions.\28\
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    \28\ 17 CFR 240.17Ad-22(e)(1).
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    As discussed above, current Section 4 of Rule 4 does not address 
the use of the Participants Fund or other liquidity resources to 
complete settlement when there is a non-default gap, and DTC is 
concerned that it could be construed as limiting the pro rata 
application of the Participants Fund to fund a settlement gap to 
default scenarios. The proposal would amend Rule 4 to expressly state 
that the Participants Fund, DTC's retained earnings, and other 
liquidity resources may be used by DTC to fund a settlement gap to 
complete settlement on a Business Day, whether the settlement gap is 
the result of a Participant Default or otherwise. In addition, the 
proposal makes clarifying and conforming changes and provides 
governance regarding the application of the Participants Fund.
    The Commission believes that the above changes are designed to 
ensure greater certainty in the Rules regarding what resources would be 
available to DTC to complete settlement in the event of a settlement 
gap. The proposal would provide a clear, transparent and enforceable 
legal basis for DTC to apply the Participants Fund, retained earnings, 
or other liquidity resources to any settlement gap. It would also 
clarify that a Participant's pro rata share of an application of the 
Participants Fund would be the same whether there is a default gap or a 
non-default gap, and expressly state that DTC may apply its available 
resources to fund settlement, in such order and in such amounts as it 
determines, in its sole discretion.
    Therefore, the Commission believes the proposal is designed to help 
ensure that DTC's Rules remain well-founded, transparent, and legally 
enforceable in all relevant jurisdictions, consistent with Rule 17Ad-
22(e)(1) under the Act.\29\
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    \29\ Id.
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C. Consistency With Rule 17Ad-22(e)(2)(i) and (v)

    Rule 17Ad-22(e)(2) under the Act requires, in part, that DTC 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to provide for governance arrangements 
that (i) are clear and transparent, and (v) specify clear and direct 
lines of responsibility.\30\
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    \30\ 17 CFR 240.17Ad-22(e)(2)(i) and (v).
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    As discussed above, the proposal would provide that a determination 
to apply the Participants Fund shall be made by either the Chief 
Executive Officer, Chief Risk Officer, Chief Financial Officer, a 
member of any management committee, Treasurer or any Managing Director 
as may be designated by the Chief Risk Officer from time to time. The 
proposal would also provide that the Board of Directors (or an 
authorized Committee thereof) shall be promptly informed of the 
determination. With this proposal, the Rules would expressly define who 
would be responsible for making the determination to apply the 
Participants Fund to a settlement gap and would require that the Board 
of Directors (or its authorized Committee) would be informed of such 
determination promptly.
    Therefore, the Commission believes the proposal is designed to 
provide for governance arrangements regarding the use of the 
Participants Fund to complete settlement that are clear and transparent 
and specify clear and direct lines of responsibility, consistent with 
Rule 17Ad-22(e)(2)(i) and (v) under the Act.\31\
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    \31\ Id.
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D. Consistency With Rule 17Ad-22(e)(7)(i)

    Rule 17Ad-22(e)(7)(i) under the Act requires, in part, that a 
covered clearing agency, like 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 the covered clearing agency, 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.\32\
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    \32\ 17 CFR 240.17Ad-22(e)(7)(i).
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    As described above, the proposal would clarify that the 
Participants Fund and other resources may be applied by DTC to fund 
settlement in the event of a default or non-default gap. The proposed 
change is designed to help ensure that DTC is able to manage its 
settlement and funding flows on a timely basis and effect same day 
settlement of payment obligations in certain foreseeable stress 
scenarios.
    Therefore, the Commission believes that the proposal is reasonably 
designed to help DTC effectively manage liquidity risk in a timely 
manner to complete settlement, and accordingly is consistent with Rule 
17Ad-22(e)(7)(i).\33\
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    \33\ Id.
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act 
and, in particular, with the requirements of Section 17A of the Act 
\34\ and the rules and regulations promulgated thereunder.
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    \34\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\35\ that proposed rule change SR-DTC-2020-011, be, and hereby is, 
approved.\36\
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    \35\ 15 U.S.C. 78s(b)(2).
    \36\ In approving the proposed rule change, the Commission 
considered the proposals' impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\37\
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    \37\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-25060 Filed 11-12-20; 8:45 am]
BILLING CODE 8011-01-P