[Federal Register Volume 86, Number 10 (Friday, January 15, 2021)]
[Notices]
[Pages 4151-4154]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-00815]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-90895; File No. SR-DTC-2020-017]
Self-Regulatory Organizations; The Depository Trust Company;
Order Approving a Proposed Rule Change To Allow for the Deposit of
Electronic Certificates of Deposit and Technical Changes
January 11, 2021.
I. Introduction
On November 20, 2020, The Depository Trust Company (``DTC'') filed
with the Securities and Exchange 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-2020-017.
The proposed rule change was published for comment in the Federal
Register on December 4, 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. 90534 (November 30,
2020), 85 FR 78371 (December 4, 2020) (SR-DTC-2020-017)
(``Notice'').
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II. Description of the Proposed Rule Change
The proposed rule change \4\ will amend the OA and Underwriting
Service Guide to implement a new application and secured electronic
vault (``E-vault'') for requests for eligibility, execution, delivery,
and storage of certificates of deposit (``CDs'') that are issued by
state and federal chartered banks. Issuers and underwriters that choose
not to use this new electronic CD program may continue to use the
existing process, including making Deposits using physical
certificates. Through the proposal, DTC will also make technical
changes in its procedures to spelling, punctuation and spacing of text
that are unrelated to the E-CD program.
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\4\ Capitalized terms not defined herein are defined in the
Rules, By-Laws and Organization Certificate of DTC (the ``Rules''),
available at www.dtcc.com/~/media/Files/Downloads/legal/rules/
dtc_rules.pdf, the DTC Operational Arrangements (Necessary for
Securities to Become and Remain Eligible for DTC Services) (``OA''),
available at http://www.dtcc.com/~/media/Files/Downloads/legal/
issue-eligibility/eligibility/operational-arrangements.pdf, and the
DTC Underwriting Service Guide (``Underwriting Service Guide''),
available at http://www.dtcc.com/~/media/Files/Downloads/legal/
service-guides/Underwriting-Service-Guide.pdf.
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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. 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 DTC's Participants,
which are financial institutions such as brokers or banks.
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\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).
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As part of its CSD services, DTC (i) makes eligible for deposit,
processes, and holds physical CDs issued by various U.S. banks and
deposited by Participants, and (ii) credits interests in those CDs to
Participants' Securities Accounts.\6\ DTC states that the use of
physical CDs presents operational concerns to Participants and to
DTC.\7\ To address these operational concerns, DTC has developed a
system that will eliminate the need for physical certificates for
certain issue types of CDs by allowing them to be issued and held in
electronic form, as described below.
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\6\ See OA, supra note 4, at 9-10.
\7\ See Notice, supra note 3, 85 FR at 78372.
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Upon implementation, the proposed rule change will address
operational concerns of Participants relating to the amount of time and
manual effort currently required for the issuance and redemption of
physical CDs by allowing for a fully electronic process for the
execution and delivery of the affected CDs. As such, DTC states that
the proposed rule change would also reduce the need for DTC to (i)
perform manual processing relating to CD deposits and (ii) reserve
space in its secure, physical vault, which is currently used for CDs,
by allowing for the storage of CDs in electronic form in a secure E-
vault.\8\
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\8\ Id.
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[[Page 4152]]
The proposed electronic process will also address concerns relating
to potential disruptions in the physical transport of physical CDs to
DTC currently made using courier and overnight delivery services. Such
disruptions may be caused by weather-related issues, such as Superstorm
Sandy in 2012, and other previously unforeseen circumstances, such as
the onset of the COVID-19 pandemic in spring 2020, both of which
impacted physical securities processing. DTC states that although it
has maintained securities eligibility and processing operations during
such circumstances, including by utilizing a letter of securities
possession \9\ (``LOP'') process that enables DTC to accept virtual
delivery of securities represented in physical form even if the
circumstances prevent actual physical delivery at that time, such
disruptions could delay the deposit of CDs and impact the timely
closing of issuances and otherwise affect liquidity in the marketplace
for CDs.\10\
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\9\ See Underwriting Service Guide, supra note 4 at 17.
\10\ See Notice, supra note 3, 85 FR at 78372.
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B. Current DTC Eligibility Process for CDs
Currently, DTC processes CDs as book entry-only (``BEO'')
securities \11\ registered to DTC's nominee, Cede & Co. BEO securities
are DTC-eligible securities for which (i) physical certificates are not
available to investors, and (ii) DTC, through its nominee, Cede & Co.,
would hold the entire balance of the offering, either at DTC (in
physical form) or through a FAST Agent in DTC's Fast Automated
Securities Transfer (``FAST'') program.
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\11\ Underwriting Service Guide, supra note 4 at 4.
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Once DTC has determined to make a security eligible for deposit at
DTC, a Participant may deposit the security at DTC for crediting to its
Securities Account. For a CD issuance, the issuing bank and Depositing
Participant must coordinate the execution and delivery of the physical
certificate to DTC in order for the Participant to timely receive
credit by the anticipated closing date.\12\ Once DTC receives an
acceptable deposit of an eligible CD from a Participant, DTC credits a
Security Entitlement \13\ in the CD to the Participant's Securities
Account,\14\ and DTC holds the original paper certificate in its secure
vault for the duration of the term of the CD.
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\12\ See DTC Deposits Service Guide (``Deposits Guide''),
available at http://www.dtcc.com/~/media/Files/Downloads/legal/
service-guides/Deposits.pdf, at 8. The closing date is the date on
which DTC's Underwriting Department will distribute an issue to the
underwriter's Participant account at DTC for book-entry delivery and
settlement upon notification by both the underwriter and the issuer
that an issue has closed (i.e., the distribution date). See
Underwriting Guide, supra note 4, at 6. On the closing date, when an
issuer or its agent and the underwriter confirm with DTC that the
issue has closed and verifies pertinent data, DTC releases the
position from an internal DTC account and credits the underwriter's
Participant account, provided that DTC has received the
certificates. See id. at 9.
\13\ Pursuant to Rule 1, the term ``Security Entitlement'' has
the meaning given to the term ``security entitlement'' in Section 8-
102 of the New York Uniform Commercial Code (``NYUCC''). See Rule 1,
supra note 4; see also NYUCC 8-102. The interest of a Participant or
Pledgee in a Security credited to its Account is a Security
Entitlement. See Rule 1, supra note 4.
\14\ See Deposits Guide, supra note 12, at 8.
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C. Proposed DTC Eligibility Process for CDs
As noted above, DTC is proposing to launch a new program to support
deposit of electronic CDs that are issued by banks (``E-CDs''). The
program will allow E-CDs to be electronically generated, signed,
delivered to DTC and held in electronic form in a secure E-vault.
Upon implementation of the proposed rule change, CDs of state and
federally chartered banks containing certain standard terms that
conform to one of four proposed templates (``System E-CD Templates'')
will be eligible for the new program. The templates cover four basic
types of CDs, specifically (i) Fixed Rate Non-Callable, (ii) Fixed Rate
Callable, (iii) Step Rate Non-Callable and (iv) Step Rate Callable.\15\
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\15\ A Fixed Rate CD pays a fixed interest rate over the entire
term of the CD. A Step Rate CD allows for increases in the interest
rate at specific, intervals that are pre-defined by the issuer. A
Callable CD contains a call feature that gives the issuing bank the
ability to redeem the CD prior to its stated maturity, usually
within a given time frame and at a preset call price as set forth in
the ``call provision'' in the master certificate. A certificate
without such a provision cannot be called by the issuer prior to
maturity date (Non-Callable).
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After implementation of the proposed rule change, in order to
facilitate needs of issuers and underwriters, DTC has the discretion to
(i) edit the System E-CD Templates, and/or (ii) add additional
templates for use in the E-CD program as System E-CD Templates that
would be published via Important Notice. Any edits to the System E-CD
Templates would not affect E-CDs that were previously issued into DTC.
DTC states that more complex CDs that do not conform to the System
E-CD Templates would be excluded from the proposed new process, because
they typically contain terms that are not amenable to the creation of
fixed templates in the format proposed herein.\16\
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\16\ See Notice, supra note 3, 85 FR at 78373.
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Pursuant to the proposed rule change, Participants will be able to
request eligibility for E-CDs that conform to the System E-CD Templates
through a new system referred to as Underwriting Central (``UWC'').\17\
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\17\ UW SOURCE, DTC's existing system for processing eligibility
requests, will continue to remain available for other types of
issuances, including the issuances of CDs in physical form.
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In order to request eligibility of a CD to be issued in electronic
form, the Underwriter will provide all required information relating to
the CD through UWC, including, but not limited to, offering
documentation and the terms to be populated in the electronic
certificate. DTC would then populate the relevant data (e.g., interest
rate(s) and maturity date) into the templates based upon the data
entered by the underwriter into the UWC application. It will be the
responsibility of the Underwriter to disseminate the electronic master
certificate to the issuer for electronic signature via UWC. The issuer
will be required to electronically sign and deliver the master
certificate to DTC prior to closing.\18\
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\18\ Whether issued in electronic or physical form, securities
must be delivered to DTC by no later than noon Eastern Time on the
business day prior to the Closing Date as currently specified in
Exhibit B of the OA.
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For CDs that do not conform to the System E-CD Templates,
eligibility requests will continue to be entered by the Underwriter
through UW SOURCE, with a physical certificate delivered to DTC prior
to closing.
Pursuant to the proposed rule change, the OA will require each E-CD
issuer to submit a new BLOR (``E-CD BLOR'') to DTC through UWC prior to
its first issuance of E-CDs. In order to minimize the additional
provisions in the Electronic Master Certificate (as defined below), the
E-CD BLOR will contain supplemental terms related to the E-CD program
(in addition to the representations that are currently included in a
BLOR). The new E-CD BLOR will provide that all E-CDs issued in
connection therewith and under one of the base CUSIP numbers set forth
on the face of the E-CD BLOR would be part of the same transaction in
which the E-CD BLOR was executed.\19\
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\19\ Section 3-119 of the NYUCC provides that a negotiable
instrument may be ``modified or affected by any other written
agreement executed as part of the same transaction.''
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E-CDs will be issued on a new form of master electronic certificate
(``Electronic Master Certificate'') that has been created specifically
for the E-CD program. A separate electronic Master Certificate would be
issued by the issuer for each broker that participates in an E-CD
offering. DTC will only make eligible E-CDs that have been initiated by
the related broker/
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dealer through UWC and then created, signed and submitted to DTC
through an electronic signature system designed by DTC for this
purpose. UWC will allow Participants to initiate a new E-CD issuance by
creating a draft Electronic Master Certificate using the applicable
System E-CD Template that would be sent to an issuer for verification
and signature. The issuer will verify and affix its electronic
signature to the Electronic Master Certificate created by the
Participant in a manner that creates an executed Electronic Master
Certificate.
Once an issuer verifies and affixes its electronic signature to an
Electronic Master Certificate, the Electronic Master Certificate will
be automatically stored in an E-vault repository, and the Electronic
Master Certificate will immediately be deemed ``delivered'' to DTC. The
E-vault will identify Cede & Co. as the entity to which the Electronic
Master Certificate was issued. According to DTC, the E-vault would
maintain an audit trail that would track all events that occur with
respect to the Electronic Master Certificate, including any authorized
changes, such as notations to reflect withdrawals, which would be noted
in the audit trail instead of on the body of the Electronic Master
Certificate.\20\ The audit trail will be incorporated as part of the
Electronic Master Certificate in accordance with the BLOR.
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\20\ Notice, supra note 3, 85 FR at 78375.
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Pursuant to the proposed rule change, the parties must also select
New York law as the governing law for all E-CDs, in order to better
allow DTC to structure a single E-CD program that it believes would be
valid for issuers in all U.S. jurisdictions.\21\
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\21\ Notice, supra note 3, 85 FR at 78376.
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D. Technical Changes
DTC will also make technical changes with respect to spelling,
punctuation and spacing of text that are unrelated to the E-CD program.
Proposed Changes to the Underwriting Service Guide
a. A glossary description provided for BLOR in the Underwriting
Guide currently describes a BLOR as an agreement between DTC and an
issuer of municipal securities. As described above, a BLOR or LOR is
required to be submitted with respect to any issue of BEO Securities
that also includes corporate securities. Pursuant to the proposed rule
change, the text will be clarified so that the description of the term
BLOR is not described as limited to applying only to municipal
securities. DTC states that the proposed change to this glossary
description would provide enhanced clarity for Participants and Issuers
with respect to Procedures relating to eligibility documentation
required for BEO Securities.\22\
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\22\ See Notice, supra note 3, 85 FR at 78378.
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b. Pursuant to the proposed rule change, DTC will eliminate
references to the Participant Terminal System (``PTS'') functions ART
and PUND as these functions have become obsolete. ART related to
inquiries about transactions of a Participant processed by DTC, and
PUND related to inquiries relating to issues and certificates for
issues held by a Participant. Such Participant inquiries may now be
directed to the Client Center available on dtcc.com.\23\ The proposed
rule change will update the Underwriting Service Guide to provide
clarity for Participants on how to submit inquires relating to DTC's
services.\24\
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\23\ See Securities Exchange Act Release No. 88050 (January 27,
2020), 85 FR 5728 (January 31, 2020) (File No. SR-DTC-2020-002).
\24\ Id.
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c. Pursuant to the proposed rule change, a reference to the IMPP
function in PTS will be deleted. The IMPP function allowed Participants
to view Important Notices about underwriting, transfer agents, and
money market instruments (``MMI''). DTC states that this function is
not being widely used by Participants.\25\ All DTC Important Notices
are accessible on dtcc.com.\26\
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\25\ See Notice, supra note 3, 85 FR at 78378.
\26\ See https://www.dtcc.com/legal/important-notices.
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III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act \27\ 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), (e)(10), and (e)(11)
promulgated under the Act,\28\ for the reasons described below.
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\27\ 15 U.S.C. 78s(b)(2)(C).
\28\ 15 U.S.C. 78q-1(b)(3)(F); 17 CFR 240.17Ad-22(e)(1),
(e)(10), and (e)(11).
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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, assure the safeguarding of
securities and funds which are in the custody or control of the
clearing agency or for which it is responsible and promote the prompt
and accurate clearance and settlement of securities transactions.\29\
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\29\ Id.
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As described above, the proposed rule change will provide for the
issuance of Electronic Master Certificates for E-CDs which will be
stored in a secure E-Vault. First, the Commission believes that by
providing for the storage of E-CDs in a secure electronic vault, the
proposal should help safeguard CDs from potential disruptions caused by
issues involving the use of a physical vault, such as weather-related
or other operational issues. As such, the Commission believes that the
proposal is designed to assure the safeguarding of securities and funds
which are in the custody or control of the clearing agency or for which
it is responsible. Second, the Commission believes that by eliminating
the need for DTC to receive original paper master certificates in
advance of CD issuances, the proposal should help reduce closing delays
caused by disruptions to physical delivery of certificates. As a
result, the Commission believes that the proposal is designed to
promote the prompt and accurate clearance and settlement of securities
transactions.
In addition, the proposed rule change will make technical changes
to provide enhanced clarity for Participants and Issuers with respect
to procedures relating to eligibility processing and the deposit of
CDs. By providing Participants and Issuers with enhanced clarity with
regard to the procedures relating to, and therefore facilitating,
eligibility processing and the deposit of CDs, the Commission believes
that the technical changes are designed to promote the 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.\30\
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\30\ 17 CFR 240.17Ad-22(e)(1).
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As described above, DTC will require E-CDs at DTC to be negotiable
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instruments governed by New York law. As described in the Notice, DTC
believes that the proposed rules change would provide for a well-
founded, clear, transparent, and enforceable legal basis for the valid
issuance of E-CDs into DTC from issuers domiciled in any relevant
jurisdiction.\31\ Specifically, DTC conducted analysis of the legal
basis for E-CDs under the Uniform Commercial Code, the New York
Electronic Signatures and Records Act,\32\ the Uniform Electronic
Transactions Act,\33\ and the federal Electronic Signatures in Global
and National Commerce Act.\34\ DTC believes that it has structured the
E-CDs to meet the requirements of each law.\35\ By conducting this
analysis of applicable laws, the Commission believes that DTC designed
the proposal to help ensure that E-CDs are well-founded, transparent,
and legally enforceable in all relevant jurisdictions, consistent with
Rule 17Ad-22(e)(1) under the Act.\36\
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\31\ See Notice, supra note 3, 85 FR at 78373-75.
\32\ N.Y. State Tech. Law Sec. 30 (McKinney 2012).
\33\ Unif. Electronic Transactions Act (Unif. L. Comm'n 1999).
\34\ Electronic Signatures in Global and National Commerce 15
U.S.C. Sec. 70.
\35\ See Notice, supra note 3, 85 FR at 78373-75.
\36\ 17 CFR 240.17Ad-22(e)(1).
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C. Consistency With Rule 17Ad-22(e)(10)
Rule 17Ad-22(e)(10) under the Act requires that DTC establish,
implement, maintain and enforce written policies and procedures
reasonably designed to establish and maintain operational practices
that manage the risks associated with physical deliveries.\37\
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\37\ 17 CFR 240.17Ad-22(e)(10).
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The proposed rule change will provide for the issuance of
Electronic Master Certificates for E-CDs. As such, the proposal should
help reduce risks of loss related to the physical CDs that would
otherwise be physically transported to DTC for deposit and later
returned to issuers or their agents for redemption upon maturity of the
CD. By reducing the risk of loss of physical master certificates by
allowing their replacement with Electronic Master Certificates, the
Commission believes the proposal is designed to manage the risks
associated with physical deliveries.\38\
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\38\ Id.
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D. Consistency With Rule 17Ad-22(e)(11)
Rule 17Ad-22(e)(11) under the Act requires that DTC establish,
implement, maintain and enforce written policies and procedures
reasonably designed to (i) maintain securities in an immobilized or
dematerialized form for their transfer by book entry; (ii) prevent the
unauthorized creation or deletion of securities; and (iii) protect
assets against custody risk through appropriate rules and procedures
consistent with relevant laws, rules and regulations in jurisdictions
where it operates.\39\
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\39\ 17 CFR 240.17Ad-22(e)(11).
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The proposed rule change will provide for the issuance of
Electronic Master Certificates for E-CDs. First, by providing for the
deposit of securities in the name of Cede & Co. to be deposited in
electronic form and stored in an electronic vault, the proposed rule
change will provide for the immobilization and dematerialization of
these master certificates for the transfer of CDs by book entry. Thus,
the Commission believes the proposal is designed to maintain securities
in an immobilized or dematerialized form for their transfer by book
entry. Second, by the use of this centralized process for issuance and
processing of CDs, the proposed rule change should facilitate the
prevention of the unauthorized creation or deletion of securities
processed through the E-CD program. Therefore, the Commission believes
the proposal is designed to prevent the unauthorized creation or
deletion of securities. Third, by the utilization of Electronic Master
Certificates in the forms of System E-CD Templates issued under the
applicable E-CD BLOR to account for relevant laws, the Commission
believes the proposal is designed to protect assets against custody
risk through appropriate rules and procedures consistent with relevant
laws, rules, and regulations in jurisdictions where it operates.
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
\40\ and the rules and regulations promulgated thereunder.
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\40\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\41\ that proposed rule change SR-DTC-2020-017, be, and hereby is,
APPROVED.\42\
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\41\ 15 U.S.C. 78s(b)(2).
\42\ 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.\43\
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\43\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-00815 Filed 1-14-21; 8:45 am]
BILLING CODE 8011-01-P