[Federal Register Volume 87, Number 108 (Monday, June 6, 2022)]
[Notices]
[Pages 34325-34328]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-12011]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-95012; File No. SR-DTC-2022-002]


Self-Regulatory Organizations; The Depository Trust Company; 
Order Approving the Proposed Rule Change To Provide Settlement Services 
for Transactions Entered Into Under the Proposed Securities Financing 
Transaction Clearing Service of the National Securities Clearing 
Corporation

May 31, 2022.

I. Introduction

    On March 28, 2022, The Depository Trust Company (``DTC'') filed 
with the Securities and Exchange Commission (``Commission'') proposed 
rule change SR-DTC-2022-002 (``Proposed Rule Change'') pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ 
and Rule 19b-4 thereunder.\2\ The Proposed Rule Change was published 
for comment in the Federal Register on April 18, 2022.\3\ For the 
reasons discussed below, the Commission is approving the Proposed Rule 
Change.\4\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 94692 (April 12, 2022), 
87 FR 22971 (April 18, 2022) (SR-DTC-2022-002) (``Notice of 
Filing'').
    \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 
(``Rules''), the DTC Settlement Service Guide (``Settlement 
Guide''), and the Guide to the 2020 DTC Fee Schedule (``Fee 
Guide''), available at http://www.dtcc.com/legal/rules-and-procedures.aspx.
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II. Description of the Proposed Rule Change

A. Background

    DTC serves as a central securities depository providing, in part, 
custodial services for equity securities, which include the 
safekeeping, record keeping, book-entry transfer, and pledge of 
securities among its Participants.\5\ The National Securities Clearing 
Corporation (``NSCC'') provides clearing and settlement services for 
trades, including equity securities.\6\ NSCC relies on an

[[Page 34326]]

interface with DTC for the book-entry movement of securities to settle 
transactions.\7\
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    \5\ See The Depository Trust Company, Disclosure Framework for 
Covered Clearing Agencies and Financial Market Infrastructures at 7, 
9-10 (December 2021) available at https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/DTC_Disclosure_Framework.pdf.
    \6\ See National Securities Clearing Corporation, Disclosure 
Framework for Covered Clearing Agencies and Financial Market 
Infrastructures at 7-10 (December 2021), available at https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/NSCC_Disclosure_Framework.pdf.
    \7\ Id. at 10.
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    NSCC has proposed to introduce a new central clearing for 
securities financing transactions (``SFTs'').\8\ In general, SFTs 
involve transactions where the parties exchange equity securities 
against cash and simultaneously agree to exchange the same securities 
and cash, plus or minus a daily interest (referred to as a rate 
payment), on a future date. Through its central clearing service, NSCC 
would novate SFT transactions entered into by its Members. The proposed 
SFTs between counterparties that are Members of NSCC would be settled 
through their respective Participant accounts at DTC.
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    \8\ Securities Exchange Act Release No. 94694 (April 12, 2022), 
87 FR 23372 (April 19, 2022) (SR-NSCC-2022-003). NSCC also filed the 
proposal contained in the Proposed Rule Change as advance notice SR-
NSCC-2022-801 with the Commission pursuant to Section 806(e)(1) of 
the Dodd-Frank Wall Street Reform and Consumer Protection Act 
entitled the Payment, Clearing, and Settlement Supervision Act of 
2010. 12 U.S.C. 5465(e)(1); 17 CFR 240.19b-4(n)(1)(i). Securities 
Exchange Act Release No. 94695 (April 12, 2022), 87 FR 23328 (April 
19, 2022) (SR-NSCC-2022-801).
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    In order to settle SFTs arising from NSCC's proposed service, DTC 
proposes to amend the Rules, the Settlement Guide, and the Fee Guide to 
(i) establish new definitions, instructions, and accounts, (ii) apply a 
modified look-ahead process to the new account that NSCC would maintain 
at DTC, (iii) establish a fee for a new transaction, and (iv) make 
conforming and technical changes.

B. New Definitions, Instructions, and Accounts for the SFT Service

    DTC proposes to revise its Rules, Settlement Guide, and Fee Guide 
to add new definitions, instructions, and accounts to provide for the 
settlement of SFTs. Specifically, for SFT purposes, NSCC would act as 
the special representative for DTC Participants who are also NSCC 
Members and would have the authority to instruct DTC, on behalf of the 
Participant, to make a transfer of securities from the Participant's 
DTC account to an account that NSCC maintains at DTC.\9\
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    \9\ The proposal would also establish a new special 
representative SFT account to be used in connection with SFT 
service.
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    The proposal would revise the Settlement Guide to include a new 
section describing settlement of SFTs. To effectuate a DVP transaction 
between Participants, NSCC would send DTC a pair of DVP instructions: 
(i) one instruction, as the Special Representative of the securities 
lending Participant, to deliver the subject securities versus payment 
from the delivering Participant to the NSCC SFT Account, and (ii) one 
instruction, on NSCC's own behalf, to deliver the subject securities 
versus payment from the NSCC SFT Account to the Account of the 
securities borrowing Participant.\10\ Effectively, pursuant to the 
DVPs, the subject securities would move from the security lending 
Participant to NSCC, and then from NSCC to the security borrowing 
Participant.
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    \10\ Under the proposal, it is possible that the securities 
lending Participant could submit its own DVP instruction to deliver 
the subject securities to the NSCC SFT account. NSCC would then have 
to make the corresponding instruction to deliver the securities to 
the securities borrowing participant, or the trade would be 
rejected.
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    When an SFT completes, NSCC would again submit a pair of DVP 
instructions: (i) one instruction as the special representative of the 
security borrowing Participant to deliver the subject securities to the 
special representative SFT account, and (ii) one instruction on NSCC's 
own behalf to deliver the subject securities from the special 
representative SFT. If the pair of instructions satisfy DTC risk 
management controls and the modified look-ahead process,\11\ DTC would 
process the deliveries.
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    \11\ See Section II.C and text accompanying note 13 infra.
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    The proposal would also provide that DTC would process SFT price 
differential payment orders, which are payment orders for the crediting 
and debiting of payment amounts between Participants relating to SFT 
activity at NSCC. Specifically, NSCC would be able to submit a SFT 
price differential payment order (i) as the special representative of 
the payee Participant to credit the amount to the payee Participant 
account, and (ii) as the special representative of the payor 
Participant to debit the amount to the payor Participant account. The 
two instructions would effectively cause DTC to transfer the payment 
orders from one Participant to NSCC, and from NSCC to another 
Participant. If the pair of instructions satisfy DTC risk management 
controls and the modified look-ahead, DTC would process the 
payments.\12\
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    \12\ See Section II.C and text accompanying note 13 infra.
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C. Modified Look-Ahead Processing

    DTC uses certain risk management controls, the Collateral Monitor 
and Net Debit Cap, to manage its credit risk. These two controls work 
together to protect the DTC settlement system in the event of a 
Participant default. The Collateral Monitor requires net debit 
settlement obligations, as they accrue intraday, to be fully 
collateralized; the Net Debit Cap limits the amount of any 
Participant's net debit settlement obligation to an amount that can be 
satisfied with DTC liquidity resources.\13\ DTC uses a look-ahead 
processing to reduce transaction blockage by applying the net amount of 
offsetting receive and deliver transactions in the same security rather 
than the gross amount of the receive transaction to a Participant's Net 
Debit Cap. The look-ahead process calculates and processes submitted 
transactions in the same CUSIP that, when processed simultaneously, 
would not violate the risk management controls of the involved 
Participants.\14\
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    \13\ See Settlement Guide, supra note 4, at 64-67.
    \14\ Specifically, the look-ahead process identifies a receive 
transaction pending due to a net debit cap insufficiency and 
determines whether an offsetting delivery transaction pending 
because of a quantity deficiency in the same security would permit 
both transactions to be completed in compliance with DTC risk 
management controls. See Settlement Guide, supra note 4, at 45.
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    The special representative SFT account is designed to be a pass-
through account for SFTs between Participants that are NSCC SFT 
counterparties, and accordingly, NSCC's obligations to DTC with respect 
to all SFTs to which the special representative SFT account was a party 
should be netted to zero.\15\ DTC states that in an effort to help 
ensure that there would not be any net settlement obligation against 
the special representative SFT account, and to prevent transaction 
blockage due to risk management controls on the special representative 
SFT account, DTC proposes to use a modified look-ahead process for the 
instructions it receives from NSCC in connection with the Special 
Representative SFT Account.\16\
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    \15\ See Notice of Filing, supra note 3, at 22973.
    \16\ See id.
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    Pursuant to the proposal, upon receipt of SFT-related instructions 
from NSCC, DTC would only complete a transaction when (i) the pair of 
instructions from NSCC are consistent in terms of the number of subject 
shares and/or dollar amount, CUSIP, and DTCC Reference ID,\17\ and (ii) 
the net effect of processing the instructions would not violate the 
respective Net Debit Caps, Collateral Monitor or other risk management 
system controls of the Participants that are on each side of the SFTs.
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    \17\ The DTCC Reference ID is the fourteen-digit UTC Loan ID 
that NSCC assigns to each SFT transaction.
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    In addition, because the modified look-ahead relies on the 
completion of

[[Page 34327]]

offsetting transactions for a particular SFT and not a net amount like 
regular look-ahead processing, transactions to and from the NSCC SFT 
Account would not be subject to either reclaims or Receiver Authorized 
Delivery (``RAD'').\18\ DTC represents that because both reclaims and 
RAD effectively permit one side of the transaction to reject or reverse 
the transaction, allowing such activity would interfere with the 
ability of the modified look-ahead to rely on the completion of the 
offsetting transactions.\19\
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    \18\ A reclaim is the return of various orders and transactions 
received by a Participant. RAD is a control mechanism that allows a 
Participant to review transactions prior to completion of 
processing. See Settlement Guide, supra note 4, at 6.
    \19\ See Notice of Filing, supra note 3, at 22973.
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D. SFT Price Differential Fee

    DTC proposes to amend the Fee Guide to establish a fee for SFT 
price differential payment orders.\20\ DTC proposes a fee of $0.005 for 
an SFT price differential payment order, which would be charged to 
payors and payees per item delivered or received.
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    \20\ The proposal establishes a fee for SFT Price Differential 
payment orders because DTC does not currently process such payment 
orders. DTC would apply other currently existing fees that are 
relevant to SFTs pursuant to its Fee Guide. For example, for a DVP 
transaction in connection with an SFT, DTC would charge a stock loan 
and return fee of $0.18 to payors and payees per item delivered and 
received.
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    According to DTC, the fee is lower than the $0.10 fee charged for 
an order for delivery or receipt in connection with uncleared stock 
loan transactions.\21\ DTC states that the reason for a lower fee is 
because NSCC's SFT service would require a higher volume of payment 
orders compared to stock loan transactions processed bilaterally.\22\ 
DTC believes that NSCC's SFT service would require a higher volume of 
payment orders because SFT Counterparties would pay and collect price 
differentials at the individual transaction level, while in a bilateral 
transaction, the counterparties would typically pay and collect at the 
CUSIP level, inclusive of all open stock loan transactions of a given 
counterparty.\23\
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    \21\ See Notice of Filing, supra note 3, at 22973.
    \22\ Id.
    \23\ See Notice of Filing, supra note 3, at 22973.
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E. Conforming and Technical Changes

    DTC proposes to make conforming changes to reflect the SFT 
activities, correct technical errors, add headings, and replace 
undefined terms with defined terms in order to ensure consistency and 
clarity of the Rules and the Settlement Guide.

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 the rules and regulations thereunder 
applicable to such organization. After careful consideration, the 
Commission finds that the Proposed Rule Change is consistent with the 
requirements of the Act and the rules and regulations applicable to 
DTC. In particular, the Commission finds that the Proposed Rule Change 
is consistent with Section 17A(b)(3)(F) and 17A(b)(3)(D) of the Act 
\25\ and Rules 17Ad-22(e)(21) \26\ thereunder.
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    \24\ 15 U.S.C. 78s(b)(2)(C).
    \25\ 15 U.S.C. 78q-1(b)(3)(F) and (3)(D).
    \26\ 17 CFR 240.17Ad-22(e)(21).
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A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act \27\ 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 
and to foster cooperation and coordination with persons engaged in the 
clearance and settlement of securities transactions.
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    \27\ 15 U.S.C. 78q-1(b)(3)(F).
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    As described above in Section II.A., DTC proposes to revise its 
Rules, Settlement Guide, and Fee Guide to be able to provide 
Participants with settlement services for SFTs cleared through the 
proposed NSCC service. As stated in Section II.B., the proposal would 
provide new definitions, instructions, and accounts to effectuate SFTs, 
and provide a basis for DTC to accept and rely on NSCC's instructions 
in connections with the proposed SFT service. Specifically, DTC would 
amend its Rules to provide for the additional authority of NSCC, as the 
special representative of a Participant, to submit DVP instructions and 
SFT price differential payment orders to DTC, on behalf of 
Participants. By providing NSCC with the authority to submit these 
instructions on behalf of the Participants, the Proposed Rule Change 
supports the efficient settlement of cleared SFTs, thereby promoting 
the prompt and accurate clearance and settlement of securities 
transactions.
    Furthermore, as described in Section II.C., the Proposed Rule 
Change would apply a modified look-ahead process to the new special 
representative SFT account in order to (i) ensure that there would not 
be any net settlement obligation against the special representative SFT 
account, and (ii) prevent transaction blockage that could occur from 
unsatisfied risk management controls on the special representative SFT 
account. By applying a modified look-ahead, the Commission believes 
that the proposal is designed to promote efficient processing of SFTs, 
thereby promoting the prompt and accurate clearance and settlement of 
securities transactions.
    Lastly, as described in Section II.E., DTC proposes to make 
conforming and technical changes. The Commission believes that the 
changes would help ensure that the Rules and the Settlement Guide 
remain consistent, clear, and accurate. Having consistent, clear, and 
accurate Rules and Settlement Guide would help Participants to better 
understand their rights and obligations regarding DTC settlement 
services in connection with the NSCC SFT service. The Commission 
believes that better enabling Participants to understand and thus 
comply with the Rules and the Settlement Guide would promote the prompt 
and accurate clearance and settlement of securities transactions.
    The Commission further believes that the Proposed Rule Change is 
reasonably designed to foster cooperation and coordination with persons 
engaged in the clearance and settlement of securities transactions. As 
described above in Section II.A., DTC proposes to amend its Rules, 
Settlement Guide, and Fee Guide to be able to process SFTs arising from 
NSCC's proposed SFT service. Although NSCC provides clearing and 
settlement services for transactions, it relies on an interface with 
DTC for the book-entry movement of securities to settle transactions. 
Without DTC's actions, NSCC would not be able to settle SFTs at DTC. 
Accordingly, the Commission believes that establishing new definitions, 
instructions, and accounts to effectuate SFTs, modifying look-ahead 
processing, and making conforming and technical changes would foster 
cooperation and coordination between NSCC and DTC.
    For the reasons stated above, the Commission believes that the 
Proposed Rule Change is reasonably designed to promote the prompt and 
accurate clearance and settlement of securities transactions, and 
foster cooperation and coordination with persons engaged in the 
clearance and settlement of securities transactions. The Commission 
believes, therefore, that the Proposed Rule Change is consistent with 
Section 17A(b)(3)(F) of the Act.\28\
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    \28\ Id.

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B. Consistency With Section 17A(b)(3)(D) of the Act

    Section 17A(b)(3)(D) of the Act requires that the rules of a 
clearing agency provide for the equitable allocation of reasonable 
dues, fees, and other charges among its participants.\29\
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    \29\ 15 U.S.C. 78q-1(b)(3)(D).
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    As described above in Section II.D., DTC would establish a fee of 
$0.005 per item delivered or received, which would be charged to the 
payor and the payee of an SFT price differential payment order. The 
Commission believes that the proposed fee for SFT price differential 
payment orders would provide for the equitable allocation of reasonable 
dues, fees, and other charges among Participants. First, the proposed 
fee of $0.005 is less than the $0.10 fee for payment order applicable 
for uncleared bilateral stock loan transactions.\30\ Second, the 
Commission understands that due to the lack of history for cleared SFT 
activity,\31\ DTC cannot estimate at this time the average number of 
SFT Price Differential payment orders that would be processed and 
cannot, therefore, quantify a precise fee.\32\ Accordingly, the 
Commission believes that the proposed fee, which is designed to take 
into account the imbalance between the amount of payment orders that 
would be required for cleared SFTs and the amount required for 
uncleared bilateral stock loan transactions, is reasonable. The 
Commission also believes that the proposed fee would be equitably 
allocated because the fee would be charged to payors and payees per 
item delivered or received in accordance with their use of SFT price 
differential payment orders and all such payors and payees would be 
treated equally with respect to the fee.
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    \30\ See Notice of Filing, supra note 3, at 22973.
    \31\ NSCC would be offering central clearing for overnight SFTs 
for the first time, and accordingly, NSCC would not be able to 
anticipate the size and composition of the SFT activities. See 
Securities Exchange Act Release No. 94694 (April 12, 2022), 87 FR 
23372, 22375 (April 19, 2022) (SR-NSCC-2022-003).
    \32\ See Notice of Filing, supra note 3, at 22973.
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    Therefore, the Commission believes that the Proposed Rule Change 
establishing a fee for the delivery and receipt of an SFT price 
differential payment order is designed to provide for the equitable 
allocation of reasonable dues, fees, and other charges among 
participants, consistent with Section 17A(b)(3)(D) of the Act.\33\
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    \33\ 15 U.S.C. 78q-1(b)(3)(D).
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C. Consistency With Rule 17Ad-22(e)(21)

    Rule 17Ad-22(e)(21) promulgated under the Act requires, in part, a 
covered clearing agency establish, implement, maintain and enforce 
written policies and procedures reasonably designed to be efficient and 
effective in meeting the requirements of its participants and the 
markets it serves, including the clearing agency's clearing and 
settlement arrangements and the scope of products cleared or 
settled.\34\
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    \34\ 17 CFR 240.17Ad-22(e)(21).
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    As described above in Section II.A., DTC proposes to revise its 
Rules, Settlement Guide, and Fee Guide to be able to process SFTs 
arising from NSCC's proposed SFT service. By doing so, DTC would assist 
NSCC to efficiently and effectively execute its new service, which is 
to clear and settle a new product. Also, as stated in Section II.B., 
the proposal would (i) provide a basis for DTC to accept and rely on 
the instructions from NSCC as special representative of DTC's 
Participants for SFTs, and (ii) establish a new type of instructions 
for SFT price differential payment orders. As stated in Section II.C., 
the proposal would revise the look-ahead processing to accommodate SFTs 
and ensure that SFTs would be processed timely and efficiently. As 
stated in Section II.D., the proposal would also revise DTC's fee guide 
to clearly establish a fee for SFT price differential payment orders, 
which are new transactions for DTC. Without such changes, NSCC would 
not be able to clear and settle SFTs at DTC.
    For the reasons stated above, the Commission believes that the 
Proposed Rule Change is reasonably designed to be efficient and 
effective in meeting the requirements of its participants and the 
market it serves, and consistent with Rule 17Ad-22(e)(21).\35\
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    \35\ 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 \36\ and 
the rules and regulations promulgated thereunder.
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    \36\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\37\ that Proposed Rule Change SR-DTC-2022-002, be, and hereby is, 
approved.\38\
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    \37\ 15 U.S.C. 78s(b)(2).
    \38\ 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.\39\
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    \39\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-12011 Filed 6-3-22; 8:45 am]
BILLING CODE 8011-01-P