[Federal Register Volume 86, Number 123 (Wednesday, June 30, 2021)]
[Notices]
[Pages 34807-34812]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-13912]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-92249; File No. SR-DTC-2021-005]


Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing of and Immediate Effectiveness of Proposed Rule Change 
To Modify the DTC Settlement Service Guide and the Form of DTC 
Pledgee's Agreement

June 24, 2021.
    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 15, 2021, 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 primarily 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)(4) thereunder.\4\ The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \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)(4).
---------------------------------------------------------------------------

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

    The proposed rule change \5\ would modify the DTC Settlement 
Service Guide (``Settlement Guide'') \6\ and the form of DTC Pledgee's 
Agreement (``Pledgee's Agreement''),\7\ as described below. 
Specifically, the proposed rule change would revise text in the

[[Page 34808]]

Settlement Guide and Pledgee's Agreement to clarify the text with 
respect to the processing of book entries of Pledge-related \8\ 
activity at DTC. The proposed revisions would reflect in the text of 
the Settlement Guide and Pledgee's Agreement that Pledged Securities 
remain credited to a Pledgor's Account unless the Pledgee makes a 
demand for the Pledged Securities, as described below. In this regard, 
the respective texts of the Settlement Guide and the Pledgee's 
Agreement currently indicate that Pledged Securities are credited to a 
Pledgee's Account. As discussed below, the proposed rule change relates 
to a technical aspect of the operational processing of Pledge 
transactions and would not impact the rights or obligations of a 
Participant or Pledgee are. The text of the proposed changes to the 
rules of DTC are described in greater detail below.
---------------------------------------------------------------------------

    \5\ Capitalized terms not defined herein are defined in the 
Rules, By-Laws and Organization Certificate of DTC (``Rules'') 
available at http://www.dtcc.com/~/media/Files/Downloads/legal/
rules/dtc_rules.pdf.
    \6\ Available at https://www.dtcc.com/legal/rules-and-procedures. The Settlement Guide constitutes Procedures of DTC 
relating to its Settlement services. 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, infra note 7. DTC's Procedures are filed with 
the Commission. They are binding on DTC and each Participant in the 
same manner as they are bound by the Rules. See Rule 27, infra note 
7.
    \7\ Available at https://www.dtcc.com/legal/rules-and-procedures. Pursuant to Rule 2, Section 3, an entity that uses DTC's 
Pledge services must enter into an agreement with DTC satisfactory 
to DTC. See Rule 2, Section 3, supra note 5. In this regard, DTC 
requires a Pledgee that is not a Participant to sign a Pledgee's 
Agreement. Participants enter into a Participant's Agreement that 
binds them to the Rules and Procedures (including, but not limited 
to, those related to Pledge activity), and are not required by DTC 
to enter into a separate Pledgee's Agreement. See also Rule 2, 
Section 1, supra note 5 (providing terms of the Participant's 
Agreement).
    \8\ Pursuant to Rule 1, the defined term ``Pledge'' in the Rules 
means, inter alia, ``creating or providing for a security interest 
in a Certificated or Uncertificated Security, a Securities Account 
or a Securities [sic] Entitlement in accordance with the NYUCC.'' 
See Rule 1, supra note 5. Pursuant to Rule 1, the term ``NYUCC'' 
means the Uniform Commercial Code of New York, as amended from time 
to time. See Rule 1, supra note 5. Pursuant to Rule 1, the term 
``Certificated Security'' has the meaning given to the term 
``certificated security'' in Section 8-102 of the NYUCC. See Rule 1, 
supra note 5. Pursuant to Section 8-102 of the NYUCC, ``certificated 
security'' means a security that is represented by a certificate. 
See NYUCC 8-102. Pursuant to Rule 1, the term ``Uncertificated 
Security'' has the meaning given to the term ``uncertificated 
security'' in Section 8-102 of the NYUCC. See Rule 1, supra note 5. 
Pursuant to Section 8-102 of the NYUCC, ``uncertificated security'' 
means a security that is not represented by a certificate. Pursuant 
to Rule 1, the term ``Securities Account'' (1) as used with respect 
to a Participant or Pledgee, means an account maintained by DTC for 
the Participant or Pledgee to which Securities transactions of the 
Participant or Pledgee effected through the facilities of DTC are 
debited and credited in the manner specified in the Rules and 
Procedures; and (2) as used with respect to DTC, means an internal 
account of DTC to which Securities transactions are debited and 
credited to DTC. See Rule 1, supra note 5. Pursuant to Rule 1, the 
term ``Security Entitlement'' has the meaning given to the term 
``security entitlement'' in Section 8-102 of the NYUCC. The interest 
of a Participant or Pledgee in a Security credited to its Account is 
a Security Entitlement. See id. Pursuant to Section 8-102 of the 
NYUCC, ``security entitlement'' means the rights and property 
interest of an entitlement holder with respect to a financial asset 
specified in Part 5. See NYUCC Sec.  8-102. NYUCC Sec.  8-501(b) 
provides that a person acquires a ``security entitlement'' when, 
inter alia, a securities intermediary indicates by book entry that a 
financial asset has been credited to the person's securities 
account. The absence of the crediting of a financial asset to an 
account of a Pledgee and the fact that an account of a Pledgee is 
not a securities account under Article 8 mean that the Pledgee has 
not acquired a security entitlement under Article 8. See NYUCC Sec.  
8-501(b). Pursuant to Section 8-102, ``entitlement holder'' means a 
person identified in the records of a securities intermediary as the 
person having a security entitlement against the securities 
intermediary. If a person acquires a security entitlement by virtue 
of Section 8-501(b)(2) or (3), that person is the entitlement 
holder. See NYUCC Sec.  8-102.
---------------------------------------------------------------------------

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 of DTC would modify the Settlement Guide 
and the form of Pledgee's Agreement, as described below. Specifically, 
the proposed rule change would revise text in the Settlement Guide and 
Pledgee's Agreement to clarify the text with respect to the processing 
of book entries of Pledge-related \9\ activity at DTC. The proposed 
revisions would reflect in the text of the Settlement Guide and 
Pledgee's Agreement that Pledged Securities remain credited to a 
Pledgor's Account unless the Pledgee makes a demand for the Pledged 
Securities, as described below. In this regard, the respective texts of 
the Settlement Guide and the Pledgee's Agreement currently indicate 
that Pledged Securities are credited to a Pledgee's Account. As 
discussed below, the proposed rule change relates to a technical aspect 
of the operational processing of Pledge transactions and would not 
impact the rights or obligations of a Participant or Pledgee.
---------------------------------------------------------------------------

    \9\ See supra note 8.
---------------------------------------------------------------------------

    The following discussion is provided by DTC and includes, but is 
not limited to, its own analysis of applicable state law provisions 
that DTC believes are relevant for purposes of describing the proposed 
rule change.
Background
Eligibility for Pledge Services
    The Pledge services of DTC are available to banks, trust companies, 
broker-dealers and other Persons approved by DTC, which have entered 
into an agreement with DTC that is satisfactory to it, for the purpose 
of effecting a Pledge of Deposited Securities to such banks, trust 
companies, broker-dealers and other Persons.\10\ A Pledgee may but need 
not be a Participant. A Pledgee is required by DTC to sign a Pledgee's 
Agreement unless it is also a Participant. Participants are not 
required to sign a separate Pledgee's Agreement to use DTC's pledge 
services because the Participant's Agreement binds the Participant to 
DTC's Rules and Procedures, including those relating to Pledge-related 
activity. Only a Pledgee that is a Participant may receive a Pledge 
Versus Payment.\11\
---------------------------------------------------------------------------

    \10\ See Rule 2, Section 3, supra note 5.
    \11\ See id.
---------------------------------------------------------------------------

Book Entry of Pledges and Legal Effect
    As indicated above, the definition of a ``Security Entitlement'' in 
the DTC Rules incorporates the definition of such term in Article 8 of 
the NYUCC and notes that ``[t]he interest of a Participant or Pledgee 
in a Security credited to its Account is a Security Entitlement.''
    However, as more fully discussed below, while the Settlement Guide 
and the Pledgee's Agreement make reference to the movement of 
Securities to a Pledgee's Account, from an operational standpoint, DTC 
does not in fact credit a Security to an Account of a Pledgee; what the 
Pledgee receives is not a Security Entitlement. The Securities remain 
credited to the Pledgor's account until the Pledgee releases the 
Pledged Securities or makes a demand for the Pledged Securities, as 
discussed below. Rather, a notation is placed on the Account of the 
Pledgor that the Securities are Pledged to the Pledgee, and the 
Securities remain in Pledged status until the Pledgee instructs 
otherwise.
    As described below, this bookkeeping method does not adversely 
impact the rights of the Pledgee in that the Pledgee maintains Control 
over the Pledged Securities, and the Pledged Securities cannot be used 
by the Pledgor for any other transaction unless the Pledgee releases 
the Securities from the Pledged status through an instruction to DTC.
DTC's Description of Pledge
    The Settlement Guide states that:
    ``[w]hen pledging securities to a pledgee, the pledgor's position 
is moved from the pledgor's general free account to the pledgee's 
account which prevents the pledged position from being used to complete 
other transactions. Likewise, the release of a pledged position would 
move the pledged position back to the pledgor's general free account 
where it

[[Page 34809]]

would then be available to complete other transactions.'' \12\
---------------------------------------------------------------------------

    \12\ See Settlement Guide, supra note 6 at 3-4.
---------------------------------------------------------------------------

    Paragraph 2 of DTC's form of Pledgee's Agreement provides that:

    ``[s]o long as Pledgee shall maintain a Depository Trust 
account, Depository Trust, upon the pledge to Pledgee of securities 
held by Depository Trust for the account of any depositor in 
Depository Trust, will make appropriate entries on its books 
transferring the securities from the account of such depositor to 
the account of Pledgee and shall maintain such securities in the 
account of Pledgee until instructed by Pledgee to release such 
securities to the account of the pledgor, to deliver such securities 
to the order of Pledgee or to transfer such securities on the books 
of Depository Trust to the account of a depositor in Depository 
Trust other than the pledgor.''

    The descriptions of DTC's Pledge arrangements in the (1) Settlement 
Guide, with respect to the text shown above, and as more fully 
described below, and (2) form of Pledgee's Agreement are imprecise 
because in practice DTC does not move or transfer the securities from 
an account of the Pledgor to an account of the Pledgee, as more fully 
described below.
    The definition of a ``Security Entitlement'' in the DTC Rules 
incorporates the definition of such term in Article 8 of the NYUCC and 
notes that ``[t]he interest of a Participant or Pledgee in a Security 
credited to its Account is a Security Entitlement.''
    However, since DTC is not in fact crediting a Security to an 
Account of a Pledgee, what the Pledgee receives is not a Security 
Entitlement.
    The definition of an ``Entitlement Holder'' in the DTC Rules 
incorporates the definition of such term in Article 8 of the NYUCC (as 
to which see below) and notes that ``[a] Participant or Pledgee is an 
Entitlement Holder with respect to a Security credited to its 
Account''.
    However, since DTC is not in fact crediting a Security to an 
Account of a Pledgee, the Pledgee is not an Entitlement Holder. 
However, the Pledgee maintains Control of the Pledged Securities as 
more fully described below. A key to a Pledgee exercising its Control 
is its ability to instruct through DTC an Entitlement Order for the 
delivery, Pledge release or withdrawal of a security.
Entitlement Order
    The definition of an ``Entitlement Order'' in the Rules 
incorporates the definition of such term in Article 8 of the NYUCC that 
``[a]n instruction from a Participant or Pledgee to the Corporation 
with respect to a Delivery, Pledge, Release or Withdrawal of a Security 
credited to a Securities Account is an Entitlement Order''.
    Note that the definition of an Entitlement Order does not require 
that the Security be credited to a Securities Account of the 
instructor. The breadth of this definition allows permitted entities, 
such as Pledgees, to issue Entitlement Orders to DTC in respect of 
Securities credited to Securities Accounts belonging to others.
    DTC Rule 9(B) \13\ provides that:
---------------------------------------------------------------------------

    \13\ See Rule 9(B), supra note 5.
---------------------------------------------------------------------------

    ``[i]f [DTC] receives an instruction from a Pledgee to effect a 
Delivery or Withdrawal of Pledged Securities, such instruction shall 
have the effect of notifying [DTC] that the Pledgee elects not to 
Release the Pledged Securities but, rather, to assert its Control over 
the Pledged Securities by the transfer of a greater interest in the 
Pledged Securities to itself or another Person. [DTC] shall accept such 
an instruction as a representation that the Pledgee is acting in 
accordance with applicable law, rules or regulations, agreements or any 
adjudication thereof.''
    Under NYUCC Section 8-507(a),\14\ a securities intermediary 
satisfies its duty to comply with an Entitlement Order if it acts with 
respect to the duty as agreed upon by the entitlement holder and the 
securities intermediary. DTC satisfies its duty to comply with an 
Entitlement Order if it acts with respect to the duty as agreed upon by 
the Entitlement Holder and the Securities Intermediary. In the case of 
Security Entitlements Pledged on the books of DTC, DTC satisfies its 
duty to comply with an Entitlement Order by complying with the 
Entitlement Order of the Pledgee.
---------------------------------------------------------------------------

    \14\ NYUCC Sec.  8-507(a).
---------------------------------------------------------------------------

Control
    Under NYUCC Section 9-106(a),\15\ ``[a] person has control of a 
certificated security, uncertificated security, or security entitlement 
as provided in Section 8-106''.\16\
---------------------------------------------------------------------------

    \15\ See NYUCC Sec.  9-106(a).
    \16\ NYUCC Sec.  8-106.
---------------------------------------------------------------------------

    Under NYUCC Section 8-106(d), ``[a] purchaser has ``control'' of a 
security entitlement if:
    (1) the purchaser becomes the entitlement holder;
    (2) the securities intermediary has agreed that it will comply with 
entitlement orders originated by the purchaser without further consent 
by the entitlement holder; or
    (3) another person has control of the security entitlement on 
behalf of the purchaser or, having previously acquired control of the 
security entitlement, acknowledges that it has control on behalf of the 
purchaser.''
    Under NYUCC Section 1-102,\17\ a purchaser is ``a person that takes 
by purchase'' with ``purchase'' being defined as ``taking by sale, 
lease, discount, negotiation, mortgage, pledge, lien, security 
interest, issue or reissue, gift, or any other voluntary transaction 
creating an interest in property''.
---------------------------------------------------------------------------

    \17\ See NYUCC Sec.  1-102.
---------------------------------------------------------------------------

    NYUCC Section 8-106(f) further provides that ``[a] purchaser has 
``control'' under subsection (c)(2) or (d)(2) even if any duty of the 
issuer or the securities intermediary to comply with instructions or 
entitlement orders originated by the purchaser is subject to any 
condition or conditions (other than further consent by the registered 
owner or the entitlement holder).''
    Official Comment 4 to NYUCC Section 8-106 \18\ notes that:
---------------------------------------------------------------------------

    \18\ See NYUCC Sec.  8-106.
---------------------------------------------------------------------------

    ``[s]ubsection (d)(2) provides that a purchaser has control if the 
securities intermediary has agreed to act on entitlement orders 
originated by the purchaser if no further consent by the entitlement 
holder is required. Under subsection (d)(2), control may be achieved 
even though the original entitlement holder remains as the entitlement 
holder.''
    Example 6 of Official Comment 4 is illustrative:

    ``Able & Co., a securities dealer, grants Alpha Bank a security 
interest in a security entitlement that includes 1000 shares of XYZ 
Co. stock that Able holds through an account with Clearing 
Corporation. Able causes Clearing Corporation to transfer the shares 
into a pledge account, pursuant to an agreement under which Able 
will continue to receive dividends, distributions, and the like, but 
Alpha has the right to direct dispositions. As in Example 3, Alpha 
has control of the 1000 shares under subsection (d)(2).''

    In the case of security entitlements Pledged on the books of DTC, 
because DTC will comply with the instructions of a Pledgee as provided 
for in Rule 9(B),\19\ which is an agreement between DTC and its 
Participants and Pledgees, a Pledgee has control of such security 
entitlements under NYUCC Section 8-106(d)(2) even when the Pledged 
Securities remain credited to the account of the Pledgor.
---------------------------------------------------------------------------

    \19\ See Rule 9(B), supra note 5.
---------------------------------------------------------------------------

    DTC's Pledge arrangements operate pursuant to the DTC Rules and the 
NYUCC. When Security Entitlements are Pledged to a Pledgee through the 
facilities of DTC, the Pledgee has a security interest in such Pledged

[[Page 34810]]

Security Entitlements.\20\ A Pledgee has ``control'' under Articles 8 
and 9 of the NYUCC and under the DTC Rules of any Security Entitlements 
Pledged to it through the facilities of DTC,\21\ and the Pledgee is 
empowered to issue Entitlement Orders \22\ to DTC to direct the 
release, delivery or withdrawal of any such Pledged Security 
Entitlements.
---------------------------------------------------------------------------

    \20\ The interest transferred is, however, only a security 
interest if the Pledgor and Pledgee have an agreement outside of DTC 
that constitutes a security agreement under applicable law and as to 
which the other requirements for attachment and enforceability of a 
security interest have been satisfied. The agreement is entered into 
by the parties outside of DTC, and DTC does not have knowledge or 
information on the existence of such an agreement between the 
parties.
    \21\ The definition of ``Control'' in the Rules incorporates the 
definition of such term in Article 8 of the NYUCC and notes that 
``[a] Pledgee has Control of Pledged Securities until they are 
Delivered, Released or Withdrawn by the Pledgee.'' See Rule 1, 
Section 1, supra note 5.
    \22\ The definition of an ``Entitlement Order'' in the Rules 
incorporates the definition of such term in Section 8-102 of the 
NYUCC and notes that ``[a]n instruction from a Participant or 
Pledgee to the Corporation with respect to a Delivery, Pledge, 
Release or Withdrawal of a Security credited to a Securities Account 
is an Entitlement Order''. As noted above, pursuant to Section 8-
102, ``entitlement order'' means a notification communicated to a 
securities intermediary directing transfer or redemption of a 
financial asset to which the entitlement holder has a security 
entitlement. See NYUCC 8-102.
---------------------------------------------------------------------------

Example of a Pledge by a Participant to a Pledgee
    When Security Entitlements credited to Participant A's account at 
DTC are Pledged to Pledgee B through the facilities of DTC, B has a 
security interest in such Pledged security entitlements.\23\
---------------------------------------------------------------------------

    \23\ As mentioned above, the interest transferred is, however, 
only a security interest if A and B have an agreement outside of DTC 
that constitutes a security agreement under applicable law and as to 
which the other requirements for attachment and enforceability of a 
security interest have been satisfied.
---------------------------------------------------------------------------

    B does not itself have ``security entitlements'' to the underlying 
securities and B is not an ``entitlement holder'' as such terms are 
defined in the NYUCC.
    However, B as Pledgee would have ``control'' under Articles 8 and 9 
of the NYUCC and under the Rules of any Security Entitlements Pledged 
to it through the facilities of DTC, and B is empowered to issue 
Entitlement Orders to DTC to direct the release, delivery or withdrawal 
of any such Pledged Security Entitlements.
Proposed Rule Change
Proposed Change to Text of Settlement Guide
    Pursuant to the proposed rule change, DTC would revise the text of 
the Settlement Guide to reflect that Pledged Securities would not move 
to an Account of the Pledgee. As discussed above, the movement of the 
securities is not required to effect a Pledge and does not impact the 
rights of Pledgor or Pledgee under the Rules or the NYUCC. Rather 
Pledged Securities continue to be credited to the Pledgor's account, 
however with a system notation showing the status of the position as 
Pledged by the Pledgor to the Pledgee. This status systemically 
prevents the Pledged position from being used to complete other 
transactions, which is consistent with the Pledgee's Control over the 
Pledged Securities, as discussed above. Likewise, the release of a 
Pledged position results in the removal of the notation of the Pledge 
status of the position and the position would become available to the 
Pledgor to complete other transactions.
    The changes to the Settlement Guide text are technical in nature, 
and while enhancing clarity with respect to the book entries performed 
by DTC as they relate to Pledge activity, the change would not impact 
the rights or obligations of Participants and Pledgees. In this regard, 
the applicable sections of the Settlement Guide would be revised to (1) 
clarify the text with respect operational aspect of book entries of 
Pledges, as discussed above, (2) make changes to text for readability 
necessary in the context of the proposed clarification, and (3) revise 
text for consistency related to the use of the defined terms, 
including, but not limited to, Delivery Versus Payment, Pledge, 
Pledgee, Pledgor and Pledge Versus Payment, as follows: (italicized 
text indicates additions; [bracketed] text indicates deletions):
    (a) Text included in Item 3 (Collateral Loans) set forth under the 
heading ``Settlement Transactions'' \24\ would be revised as follows:
---------------------------------------------------------------------------

    \24\ See Settlement Guide, supra note 6 at 3-4.

    ``The collateral loan service allows a Participant (the 
[pledgor] Pledgor) to [pledge] Pledge securities as collateral for a 
loan or for other purposes and also request the release of [pledged] 
Pledged securities. This service allows such [pledges] Pledges and 
[pledge] Pledge releases to be made free, meaning that the money 
component of the transaction is settled outside of the depository, 
or valued, meaning that the money component of the transaction is 
settled through DTC as a debit/credit to the [pledgor's] Pledgor's 
and [pledgee's] Pledgee's DTC money settlement account. When 
[pledging] Pledging securities to a [pledgee] Pledgee, the 
[pledgor's] Pledgor's position [is moved from the Pledgor's general 
free account to the Pledgee's account] continues to be credited to 
the Pledgor's account, however with a system notation showing the 
status of the position as Pledged by the Pledgor to the Pledgee. 
This status systemically [which] prevents the [pledged] Pledged 
position from being used to complete other transactions. Likewise, 
the release of a [pledged] Pledged position [would move the pledged 
position back to the] results in the removal of the notation of the 
Pledge status of the position and the position would become 
[pledgor's general free account where it would then be] available to 
---------------------------------------------------------------------------
the Pledgor to complete other transactions.''

    (b) Text included under the heading ``About the Product'' that 
appears under the heading ``Collateral Loan Program'' \25\ would be 
revised as follows:
---------------------------------------------------------------------------

    \25\ See Settlement Guide, supra note 6 at 8-9.

    ``The Collateral Loan Program allows you to [pledge] Pledge 
securities [from] held in your general free account as collateral 
for a loan or for other purposes (such as Letters of Credit) to a 
[pledgee] Pledgee participating in the program. You can also request 
the [pledgee] Pledgee to release [pledge] Pledged securities [back 
to your general free account]. These [pledges] Pledges and releases 
can be free (when money proceeds are handled outside DTC) or valued 
(when money proceeds are applied as debits and credits to the 
[pledgee's] Pledgee's and [pledgor's] Pledgor's money settlement 
accounts). A Pledgee may, but need not be, a Participant. Only a 
Pledgee which is a Participant may receive valued [pledges] 
---------------------------------------------------------------------------
Pledges.''

    (c) Text included under the heading ``Pledges to the Options 
Clearing Corporation'' \26\ would be revised as follows:
---------------------------------------------------------------------------

    \26\ See Settlement Guide, supra note 6 at 10.

    ``A Participant writing an option on any options exchange may 
fully collateralize that option by [pledging] Pledging the 
underlying securities by book-entry through DTC to the Options 
Clearing Corporation (OCC). If the option is called (exercised), the 
securities may be released and delivered to the holder of the call. 
If the option contract is not exercised, OCC validates a release of 
the [pledged] Pledged securities [, which are then returned to the 
---------------------------------------------------------------------------
Participant's general free account].''

    (d) Text included under the heading ``Release of Deposits with 
Options Clearing Corporation on Expired Options'' would be revised as 
follows:

    ``OCC automatically releases securities deposited with it to 
cover margin requirements on an option contract when the option 
contract expires. [The securities are then allocated to your general 
free account.] Notification of the released securities is received 
via the Collateral Loan Services functionality in the Settlement 
User Interface or automated output.''

    (e) In addition to any proposed changes to apply generally with 
respect to the Settlement Guide text as described above, text included 
under

[[Page 34811]]

the heading ``Shared Control Accounts'' \27\ would be revised to delete 
text shown below that states ``Pledgee accounts continue to be 
available at DTC.'' This sentence was added to the text when Shared 
control account arrangements were added to the Procedures \28\ to 
clarify that the existing Pledge-related services would continue to be 
offered. As both the original Pledge program and the Shared control 
account process are both established programs, DTC believes the 
sentence is no longer necessary.
---------------------------------------------------------------------------

    \27\ See Settlement Guide, supra note 6 at 15-16.
    \28\ See Securities Exchange Act Release No. 40191 (July 10, 
1998), 63 FR 38444 (July 16, 1998) (SR-DTC-98-5).
---------------------------------------------------------------------------

About the Product
    Shared control accounts are available as an alternative to 
``agreement to pledge'' arrangements.
Background
    When a Participant [pledges] Pledges securities to [the pledgee 
account of] a [pledge] Pledgee at DTC (sometimes called a ``hard 
pledge''), the securities are under the sole control of the [pledgee] 
Pledgee. Only the [pledgee] Pledgee can redeliver or release the 
securities. [Pledgee accounts continue to be available at DTC.]
    Shared control accounts are available at DTC as an alternative to 
agreement to [pledge] Pledge (sometimes called ``agreement to 
deliver'') arrangements. A [pledgee] Pledgee has control over 
securities delivered by a Participant to the Participant's shared 
control account at DTC since the [pledge] Pledgee has the ability to 
redeliver the securities without further consent by the Participant. 
Until the [pledgee] Pledgee redelivers the securities, the Participant 
has the flexibility to redeliver or make substitutions for the 
securities without obtaining the [pledgee's] Pledgee's release of the 
securities.
    Shared controls are separately identified in DTC's Reference 
Directory. Participants interested in establishing a shared control 
account should contact their Relationship Manager.
Procedures for DTC Shared Control Accounts
    The following procedures are an addition to DTC's Procedures for 
Pledgees.
    1. Any Participant may establish a shared control account at DTC 
and may designate any DTC [pledgee] Pledgee to be the [pledgee] Pledgee 
for that shared control account. A Participant may deliver securities 
(or other financial assets) by a [free pledge] Free Pledge from any of 
its DTC accounts (the ``original account'') to its shared control 
account in order to grant a security interest or other interest in the 
securities to the [pledgee] Pledgee. The shared control account is an 
account of the Participant and is identified with a separate account 
number from any other account of the Participant. A Participant may 
establish multiple shared control accounts, but only one [pledge] 
Pledge can be designated for each shared control account.
    2. Except as modified by these procedures, the operation of a 
shared control account is identical to the operation of a DTC [pledge] 
Pledge [account] and all DTC procedures applicable to [pledge] Pledge 
[accounts] are applicable to shared control accounts. No [deliveries 
vs. payment] Deliveries Versus Payment, [pledges vs. payment] Pledges 
Versus Payment, or physical deposits can be made to a shared control 
account and no [deliveries vs. payment ] Pledges Versus Payment, 
[pledges vs. payment] Pledges Versus Payment, or physical withdrawals 
can be made from a shared control account. A Participant should not 
deliver securities to another Participant's shared control account. In 
the instructions for a delivery of securities to a shared control 
account, the mandatory hypothecation code field should be completed in 
the same manner as it is for a Pledge made without the use of a shared 
control [delivery to a pledge] account. The DTC fees and charges for a 
transaction involving a shared control account are the same as the fees 
and charges for a Pledge transaction that does not [involving] involve 
a [pledge] Pledge account. The DTC monthly account usage charges 
applicable to a shared control account are charged to the Participant. 
The DTC reports and statements to the Participant and the [pledge] 
Pledge for a transaction involving a shared control account are the 
same as the reports and statements for a transaction involving a 
[pledge] Pledge that does not involve a shared control account.
    3. [As with a pledge account, voting]Voting rights on the 
securities credited to a shared control account are assigned to the 
Participant. Cash dividend and interest payments and other cash 
distributions on such securities are credited to the original account. 
Distribution of securities for which the ex-distribution date is on or 
prior to the payable date or in which the distribution is payable in a 
different security are also credited to the original account. Any stock 
splits or other distributions of the same securities for which the ex-
distribution date is after the payable date are credited to the shared 
control account.
    4. The securities credited to a shared control account cannot be 
designated as or included in the collateral for any obligation of the 
Participant or the [pledgee] Pledgee to DTC. DTC has no lien or other 
interest in any securities credited to a shared control account.''
Proposed Change to Text of the Pledgee's Agreement
    Pursuant to the proposed rule change, DTC would revise the text of 
the Pledgee's Agreement to reflect that Pledged Securities do not move 
to a Pledgee account. The change is technical in nature and while 
enhancing clarity with respect to the book entries performed by DTC as 
they relate to Pledge activity, the change would not impact the rights 
or obligations of Participants and Pledgees pursuant to the Rules, 
Settlement Guide and/or the Pledgee's Agreement. In this regard, the 
applicable text of the Pledgee's Agreement would be revised as follows: 
(italicized text indicates additions; [bracketed] text indicates 
deletions):
    ``[s]o long as Pledgee shall maintain a Depository Trust account, 
Depository Trust, upon the pledge to Pledgee of securities held by 
Depository Trust for the account of any depositor in Depository Trust, 
will make appropriate entries on its books to indicate the pledge of 
[transferring] the securities from [the account of] such depositor to 
the [account of] Pledgee and shall maintain such securities [in the 
account of] with a notation that the securities are pledged by the 
depositor to the Pledgee until instructed by Pledgee to release such 
securities to the [account of the] pledgor, to deliver such securities 
to the order of Pledgee or to transfer such securities on the books of 
Depository Trust to the account of a depositor in Depository Trust 
other than the pledgor.''
Effective Date
    The proposed rule change would become effective upon filing.
2. Statutory Basis
    Section 17A(b)(3)(F) of the Act,\29\ 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 for the reasons described below.
---------------------------------------------------------------------------

    \29\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    As described above, the proposed rule change would allow 
Participants and

[[Page 34812]]

Pledgees to more readily understand the Rules and Procedures relating 
to the processing of book entries of Pledges at DTC by (1) clarifying 
text to more accurately reflect the operational process of how book 
entries of Pledges are entered on DTC's system, and (2) making changes 
to text for readability necessary in the context of the proposed 
clarification. By clarifying the Rules to facilitate Participants' and 
Pledgees' ability to understand the operational processes relating to 
Pledge services, and in particular with respect to how book-entries are 
made on DTC's system with respect to Pledge transactions, DTC believes 
that the proposed changes would facilitate Participants' and Pledgees' 
ability to process Pledge transactions by enhancing their understanding 
of how Securities subject to a Pledge transaction are credited to and 
held in a Pledgee's Account pending either their release from Pledge or 
the exercise of a demand for the Pledged Securities by the Pledgee. 
Therefore, by facilitating the ability of Participants to understand 
how book-entries of Securities movements are performed and how Pledged 
Securities are held, DTC believes the proposed rule change would 
promote the prompt and accurate clearance and settlement of securities 
transactions, consistent with Section 17A(b)(3)(f) of the Act.\30\
---------------------------------------------------------------------------

    \30\ Id.
---------------------------------------------------------------------------

(B) Clearing Agency's Statement on Burden on Competition

    DTC does not believe that the proposed rule change would have any 
impact on competition because it would merely make technical clarifying 
changes and changes for enhanced readability to the text of the 
Settlement Guide and the Pledgee's Agreement that would not otherwise 
affect Participants' and Pledgees' rights or obligations.

(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 were 
received by DTC and were filed as an Exhibit 2 to the proposal, as 
required by the Form 19b-4 and the General Instructions thereto.
    The proposed rule change was originally filed with the Commission 
in April 2021 and posted to the website of DTC's parent company, The 
Depository Trust and Clearing Corporation (``DTCC''). However, because 
the filing did not satisfy a regulatory formatting requirement, the 
Commission had to reject the filing and it was subsequently removed 
from the DTCC website.
    In the time it has taken for DTC to refile the proposal, DTC has 
received several written comments, which, again, were filed as an 
Exhibit 2 to the proposal. Although DTC understands those comments to 
be generally supportive of the proposed changes, based on DTC's review 
of each of the comments, DTC believes there is a general 
misunderstanding of the purpose of this proposed rule change.
    For the sake of clarity, and as more fully described above, this 
proposed rule change will not alter DTC's current practices. Rather, it 
will merely clarify how securities Pledged through DTC are recorded in 
DTC's system. More specifically, and as more fully described above, the 
Settlement Guide currently states that Securities Pledged through DTC 
are held in an account of the Pledgee. However, in practice, the 
Securities remain in the Pledgor's account but are marked as Pledged. 
This is the existing practice today and will not change. Rather, the 
proposed change will clarify the text of the Settlement Guide to better 
reflect the current practice. The change will not affect the legal 
rights or obligations of the parties involved in the pledge.
    DTC will notify the Commission of any additional written comments 
received by DTC.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) \31\ of the Act and paragraph (f) \32\ of Rule 19b-4 
thereunder. 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.
---------------------------------------------------------------------------

    \31\ 15 U.S.C 78s(b)(3)(A).
    \32\ 17 CFR 240.19b-4(f).
---------------------------------------------------------------------------

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-2021-005 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-2021-005. 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-2021-005 and should be submitted on 
or before July 21, 2021.
---------------------------------------------------------------------------

    \33\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\33\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-13912 Filed 6-29-21; 8:45 am]
BILLING CODE 8011-01-P