[Federal Register Volume 87, Number 169 (Thursday, September 1, 2022)]
[Notices]
[Pages 53807-53812]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-18859]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-95615; File No. SR-DTC-2021-017]


Self-Regulatory Organizations; The Depository Trust Company; 
Order Approving of Proposed Rule Change To Enhance Capital Requirements 
and Make Other Changes

August 26, 2022.

I. Introduction

    On December 13, 2021, The Depository Trust Company Corporation 
(``DTC'') filed with the Securities and Exchange Commission 
(``Commission'') proposed rule change SR-DTCC-2021-017 (the ``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 
December 29, 2021.\3\ On January 26, 2022, pursuant to Section 19(b)(2) 
of the Act,\4\ the Commission designated a longer period within which 
to approve, disapprove, or institute proceedings to determine whether 
to approve or disapprove the Proposed Rule Change.\5\ On March 23, 
2022, the Commission instituted proceedings to determine whether to 
approve or disapprove the Proposed Rule Change.\6\ On June 23, 2022, 
the Commission designated a longer period for Commission action on the 
proceedings to determine whether to approve or disapprove the Proposed 
Rule Change.\7\ The Commission has received comments regarding the 
substance of the Proposed Rule Change.\8\ For the reasons discussed 
below, the Commission is approving the Proposed Rule Change.\9\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 93854 (December 22, 
2021), 86 FR 74122 (December 29, 2021) (File No. SR-DTC-2021-017) 
(``Notice of Filing'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ Securities Exchange Act Release No. 94067 (January 26, 
2022), 87 FR 5548 (February 1, 2022) (SR-DTC-2021-017).
    \6\ Securities Exchange Act Release No. 94495 (March 23, 2022), 
87 FR 18451 (March 30, 2022) (SR-DTC-2021-017).
    \7\ Securities Exchange Act Release No. 95143 (June 23, 2022), 
87 FR 38786 (June 29, 2022) (SR-DTC-2021-017).
    \8\ The Commission received one comment letter that does not 
bear on the Proposed Rule Change. The comment is available at 
https://www.sec.gov/comments/sr-dtc-2021-017/srdtc2021017.htm. Since 
the proposed changes contained in this Proposed Rule Change are 
similar to changes proposed simultaneously by DTC's affiliates, 
National Securities Clearing Corporation and Fixed Income Clearing 
Corporation, the Commission has considered all public comments 
received on the proposals regardless of whether the comments are 
submitted to the Proposed Rule Change or to the proposals filed by 
DTC's affiliates.
    \9\ Capitalized terms not defined herein are defined in Rules, 
By-Laws and Organization Certificate (``Rules''), available at 
https://www.dtcc.com/~/media/Files/Downloads/legal/rules/
dtc_rules.pdf.
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II. Description of the Proposed Rule Change

    DTC proposes to amend its Rules to (A) increase the capital 
requirements applicable to its participants,\10\ (B) revise its credit 
risk monitoring system, and (C) make certain other clarifying, 
technical, and supplementary changes to implement changes (A) and (B).
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    \10\ DTC states that these capital requirements have not been 
updated in over 20 years. See Notice of Filing, supra note 3, at 
74122.
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A. Changes to DTC's Capital Requirements for Participants

i. U.S. Participants
    U.S. Broker-Dealer Participants: DTC proposes to increase its 
minimum excess net capital requirements for its U.S. broker-dealer 
participants. Currently, U.S. broker-dealer participants are required 
to maintain a minimum amount of not less than $500,000 in excess net 
capital over the greater of (i) the minimum capital requirement imposed 
on it pursuant to Exchange Act Rule 15c3-1,\11\ or (ii) such higher 
minimum capital requirement imposed by the registered broker-dealer's 
designated examining authority.\12\ DTC proposes to increase the 
minimum excess net capital (``Excess Net Capital'') \13\ requirements 
U.S. broker-dealer participants to $1 million.
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    \11\ 17 CFR 240.15c3-1.
    \12\ See Section 1(b) of the Policy Statements on the Admission 
of Participants and Pledgees (the ``Policy Statement'') of the 
Rules, supra note 9. See also, Section 1(h)(ii) of Rule 3 of the 
Rules, supra note 9.
    \13\ DTC proposes to define ``Excess Net Capital'' as the net 
capital greater than the minimum required, as calculated in 
accordance with the broker-dealer's regulatory and/or statutory 
requirements.
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    U.S. Bank and Trust Company Participants: For members who are U.S. 
banks or U.S. trust companies who are also banks,\14\ DTC proposes to 
(1) change the capital measure from equity capital to common equity 
tier 1 capital

[[Page 53808]]

(``CET1 Capital''),\15\ (2) raise the minimum capital requirements from 
$2 million in equity capital to $15 million in CET1 Capital, and (3) 
require such members to be well capitalized (``Well Capitalized'').\16\ 
The proposal would align DTC's capital requirements with banking 
regulators' changes to regulatory capital requirements over the past 
several years, which have standardized and harmonized the calculation 
and measurement of bank capital and leverage throughout the world.\17\ 
Consistent with these changes by banking regulators, DTC states that it 
believes the appropriate capital measure for participants that are U.S. 
banks and trust companies should be CET1 Capital and that DTC's capital 
requirements for participants should be enhanced to be consistent with 
these increased regulatory capital requirements.\18\ DTC further states 
that it believes these enhanced capital requirements better measure the 
capital available to participants to absorb losses arising out of their 
settlement activities at DTC or otherwise and would help DTC more 
effectively manage and mitigate the credit risks posed by its 
participants while providing fair and open access to participation at 
DTC.\19\
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    \14\ For U.S. trust companies who are not banks, DTC is not 
changing its existing capital requirement of $2 million. DTC treats 
U.S. trust companies that are banks and non-banks differently 
because they present different risks based on the attendant risks of 
their business activities, with trust companies engaging in banking 
activities (e.g., receiving deposits and making loans) being subject 
to greater risks than trust companies that limit their activities to 
trust activities (e.g., acting as a trustee, other fiduciary or 
transfer agent/registrar). See Notice of Filing, supra note 3, at 
74125.
    \15\ DTC proposes to define ``CET1 Capital'' as an entity's 
common equity tier 1 capital, calculated in accordance with such 
entity's regulatory and/or statutory requirements.
    \16\ DTC proposes to incorporate the definition of ``Well 
Capitalized'' as that term is defined by the Federal Deposit 
Insurance Corporation in its capital adequacy rules and regulations. 
See 12 CFR 324.403(b)(1).
    \17\ See Notice of Filing, supra note 3, at 74124.
    \18\ See id.
    \19\ See id., at 74128. DTC also provided, in the confidential 
information submitted as part of this Proposed Rule Change, an 
analysis of U.S. banks' capital to determine the appropriate level 
of capital requirement.
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    Additionally, DTC states that requiring U.S. banks and trust 
companies that are banks to be Well Capitalized ensures that 
participants are well capitalized while also allowing CET1 Capital to 
be relative to either the risk-weighted assets or average total assets 
of the bank or trust company.\20\ DTC further states that expressly 
tying the definition of Well Capitalized to the FDIC's definition of 
``well capitalized'' will ensure that the proposed requirement keeps 
pace with future changes to regulatory capital requirements.\21\
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    \20\ See id., at 74125.
    \21\ See id.
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ii. Non-U.S. Participants
    Currently, a participant who is a non-U.S. broker-dealer or bank is 
subject to a multiplier that requires such participant to maintain 
capital of either 1.5, 5, or 7 times its otherwise-applicable capital 
requirements.\22\
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    \22\ The applicable multiplier is based on which generally 
accepted accounting standards (``GAAP'') the non-U.S. participant 
uses to prepare its financial statements, when not prepared in 
accordance with U.S. GAAP. See Section 2 of the Policy Statement of 
the Rules, supra note 9.
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    Non-U.S. Broker-Dealer Participants: DTC proposes to require non-
U.S. broker-dealer participants to maintain a minimum of $25 million in 
total equity capital. DTC states the multiplier was designed to account 
for the less transparent nature of accounting standards other than U.S. 
GAAP.\23\ However, given that accounting standards have converged over 
the years, DTC no longer believes the multiplier is necessary and its 
retirement would be a welcomed simplification for both DTC and its 
participants.\24\
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    \23\ See Notice of Filing, supra note 3, at 74126.
    \24\ See id.
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    Additionally, DTC states its approach to managing credit risk is 
multifaceted, which includes requirements of operational capability in 
addition to financial responsibility.\25\ Based on its experience, DTC 
believes the flat equity capital requirement is warranted for non-U.S. 
broker-dealers based on the added jurisdictional and regulatory risks, 
while still allowing for fair and open access to DTC participation.\26\
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    \25\ See id., at 74128.
    \26\ See id.
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    Non-U.S. Bank Participants: Like U.S. bank members, DTC proposes 
that non-U.S. bank participants maintain at least $15 million in CET1 
Capital. DTC proposes additional requirements for non-U.S. bank 
participants as follows: (1) comply with the greater of (i) the 
participant's home country minimum capital and ratio requirements, or 
(ii) the minimum capital and ratio standards promulgated by the Basel 
Committee on Banking Supervision,\27\ (2) provide an attestation for 
itself, its parent bank, and its parent bank holding company detailing 
the minimum capital requirements and capital ratios required by their 
home country regulator,\28\ and (3) notify DTC of (i) any breach of its 
minimum capital and ratio requirements within two business days, or 
(ii) any changes to its requirements within 15 calendar days.
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    \27\ See Basel Committee on Banking Supervision, The Basel 
Framework, available at https://www.bis.org/basel_framework/index.htm?export=pdf. DTC states that the proposal will align DTC's 
capital requirements with banking regulators' changes to regulatory 
capital requirements over the past several years, which have 
standardized and harmonized the calculation and measurement of bank 
capital and leverage throughout the world. See Notice of Filing, 
supra note 3, at 74124. DTC proposes tying its minimum requirement 
to the requirements promulgated by the Basel Committee on Banking 
Supervision to ensure that its non-U.S. bank participants meet 
minimum international standards where their home country 
requirements may be more lenient. See id., at 74129.
    \28\ DTC also proposes to require non-U.S. bank participants to 
periodically provide new attestations on at least an annual basis 
and upon request by DTC.
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iii. Other Types of Participants
    Currently, an entity applying to be a participant other than a 
registered broker-dealer, bank or trust company is required to satisfy 
such minimum standards of financial responsibility as determined by 
DTC. DTC proposes to adopt more specific standards for different 
participant types.
    Central Securities Depository Participants: DTC proposes to 
establish specific minimum capital requirements for U.S.\29\ or non-
U.S. central securities depository participants of at least $5 million 
in equity capital. DTC proposes that any clearing corporation would be 
deemed to be a CSD for the purposes of determining such applicant or 
participant's minimum financial requirements. DTC states it believes 
creating a standard capital requirement for CSD participants is 
appropriate due to the systemic importance of these participants and 
the need to hold these participants to a consistent, high standard to 
ensure that they have sufficient capital to fulfill their systemically 
important role.\30\
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    \29\ DTC is the central securities depository for the United 
States. See U.S. Department of the Treasury, Designations, Financial 
Market Utility Designations, available at https://home.treasury.gov/policy-issues/financial-markets-financial-institutions-and-fiscal-service/fsoc/designations.
    \30\ See Notice of Filing, supra note 3, at 74125.
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    Securities Exchange Participants: DTC proposes to establish 
specific minimum capital requirements for participants that are U.S. 
national securities exchanges or non-U.S. securities exchanges or 
multilateral trading facilities of at least $100 million in equity 
capital. DTC states it believes creating a standard capital requirement 
for securities exchange participants is appropriate due to the systemic 
importance of these participants and the need to hold these 
participants to a consistent, high standard to ensure that they have 
sufficient capital to fulfill their systemically important role.\31\
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    \31\ See id.
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    U.S. Settling Bank Participants: DTC proposes to require that a 
settling bank participant or applicant that, in accordance with such 
entity's regulatory and/or statutory requirements, calculates a Tier 1 
RBC Ratio must have a Tier 1 RBC Ratio \32\ at all times equal

[[Page 53809]]

to or greater than the Tier 1 RBC Ratio that would be required for such 
settling bank or applicant to be well capitalized.\33\
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    \32\ DTC proposes to define ``Tier 1 RBC Ratio'' as the ratio of 
an entity's tier 1 capital to its total risk-weighted assets, 
calculated in accordance with such entity's regulatory and/or 
statutory requirements.
    \33\ See supra note 16.
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    All Other Types of Participants: For all other U.S. or non-U.S. 
participants, DTC proposes that the participant must maintain 
compliance with its home country's minimum financial requirements. DTC 
also proposes that it may, based on the information provided or 
concerning the participant, assign an additional minimum financial 
requirement to the participant, which it will determine based on how 
closely it resembles another participation type and its risk 
profile.\34\
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    \34\ Under the proposal, DTC would be obligated to promptly 
notify and discuss any additional minimum financial requirement with 
the applicant or participant. In the event that DTC ultimately were 
to deny participation to an applicant, then Section 19(d) of the 
Exchange Act would apply, allowing the opportunity for Commission 
review. See 15 U.S.C. 78s(d).
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iv. Implementation Timeframe
    DTC proposes to implement the proposed changes to its minimum 
participation capital requirements one year after the Commission's 
approval of the Proposed Rule Change.\35\ During the one-year period, 
DTC would periodically provide participants with an estimate of their 
capital requirements based on the proposal.\36\
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    \35\ The changes to DTC's Watch List and enhanced surveillance 
list discussed in Section II.B below will not be subject to the one 
year delayed implementation.
    \36\ See Notice of Filing, supra note 3, at 74127.
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B. Changes to DTC's Watch List and Enhanced Surveillance List

    DTC currently uses two credit risk monitoring systems: a Watch List 
and a separate list of participants subject to enhanced surveillance 
(``enhanced surveillance list''). The current Watch List includes 
participants that have either (1) receive a heightened credit risk 
rating based on DTC's Credit Risk Rating Matrix (``CRRM''),\37\ or (2) 
been deemed to pose a heightened credit risk to DTC or other 
participants.\38\ DTC also maintains a separate enhanced surveillance 
list, which includes participants who are subject to a more thorough 
monitoring of its financial condition and operational capability based 
on DTC's determination that the participant poses heightened credit 
risks, which may include participants already on or soon to be on the 
Watch List.\39\ Participants on the enhanced surveillance list are 
reported to DTC's management committees and are regularly reviewed by 
DTC senior management.\40\ Participants on the Watch List or the 
enhanced surveillance list are subject to more thorough monitoring by 
DTC of its financial condition and operational capability and may be 
required to make more frequent financial disclosures to DTC.\41\
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    \37\ DTC participants generally are subject to the CRRM, in 
which each participant is rated on a scale of one to seven with 
seven reflecting the highest credit risk posed to DTC. Participants 
who receive a CRRM rating of five to seven are currently, 
automatically placed on the Watch List. See Rule 1 and Section 10(b) 
of Rule 2 of the Rules, supra note 9.
    \38\ See Rule 1 and Section 10 of Rule 2 of the Rules, supra 
note 9. In making its determination, DTC may consider any 
information DTC obtains through continuously monitoring its 
participants for compliance with its participation requirements. See 
Section 10(d) of Rule 2 of the Rules, supra note 9.
    \39\ See Section 10(c) of Rule 2 of the Rules, supra note 9.
    \40\ See Section 10(e) of Rule 2 of the Rules, supra note 9.
    \41\ See id.
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    DTC believes that maintaining two separate lists has confused 
various DTC stakeholders,\42\ so DTC proposes to remove references to 
an enhanced surveillance list from its Rules.\43\ DTC also proposes to 
remove participants with a CRRM rating of five from being automatically 
included on the Watch List. DTC states that participants with a CRRM 
rating of five represent the largest single CRRM rating category, but 
DTC does not believe all such participants present heightened credit 
concerns.\44\ DTC would still retain the authority to place a 
participant with a CRRM rating of five on the Watch List or otherwise 
if DTC deems the participant poses a heightened risk to DTC. DTC 
believes that these procedures would allow it to appropriately monitor 
the credit risks presented to it by its participants and that the 
enhanced surveillance list is not necessary because participants on the 
enhanced surveillance list are subject to the same potential 
consequences as participants placed on the Watch List.\45\
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    \42\ See Notice of Filing, supra note 3, at 74127.
    \43\ For any participants currently on the enhanced surveillance 
list that are not also on the Watch List, DTC will add these 
participants to the Watch List. See id. DTC also proposes to clarify 
in its Rules that participants on the Watch List are reported to 
DTC's management committees and regularly reviewed by DTC's senior 
management.
    \44\ See id. DTC states that the majority of participants with a 
CRRM rating of 5 are either rated ``investment grade'' by external 
rating agencies or, in the absence of external ratings, DTC believes 
are equivalent to investment grade, as many of these participants 
are primary dealers and large foreign banks. See id.
    \45\ See id. at 74124, 74127.
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C. Other Changes

    DTC proposes, without substantive effect, to improve the 
readability and accessibility of the Policy Statement by (1) adding 
appropriate headings and sub-headings and renumbering sections as 
appropriate, (2) deleting undefined terms and replacing them with 
appropriate defined terms, including replacing references to ``foreign 
entities'' with references to ``non-U.S. entities'' and (3) fixing 
typographical and other errors, in each case throughout the Policy 
Statement.

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \46\ provides that the Commission 
shall 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 careful review of 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 Sections 17A(b)(3)(F) of the 
Act,\47\ and Rules 17Ad-22(e)(4) and (e)(18) thereunder,\48\ for the 
reasons described below.
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    \46\ 15 U.S.C. 78s(b)(2)(C).
    \47\ 15 U.S.C. 78q-1(b)(3)(F).
    \48\ 17 CFR 240.17Ad-22(e)(4) and (e)(18).
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A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act requires, among other things, that 
the rules of a clearing agency be designed to promote the prompt and 
accurate clearance and settlement of securities transactions, 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 
protect investors and the public interest; and are not designed to 
permit unfair discrimination in the admission of participants or among 
participants in the use of the clearing agency.\49\ Based on its review 
of the record,\50\ the Commission finds that the proposal is consistent 
with Section 17A(b)(3)(F) of the Act.
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    \49\ 15 U.S.C. 78q-1(b)(3)(F).
    \50\ As part of the Proposed Rule Change, DTC filed Exhibit 3--
Supporting Information, which provided analysis on the rationale for 
and impact of the proposal. Pursuant to 17 CFR 240.24b-2, DTC 
requested confidential treatment of Exhibit 3. The confidential 
information provided more granular support for this analysis, and it 
includes a detailed analysis of the impact of each proposed minimum 
capital requirement on participants, by category, as compared to 
their current capital levels.

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[[Page 53810]]

i. Prompt and Accurate Clearance and Settlement and Safeguarding of 
Securities and Funds
    The Commission believes that the proposal is designed to promote 
the prompt and accurate clearance and settlement of securities 
transactions, and assure the safeguarding of securities and funds which 
are in the custody or control of DTC. The Commission believes that 
participant standards at covered clearing agencies should seek to limit 
the potential for participant defaults and, as a result, losses to non-
defaulting participants in the event of a participant default. As the 
Commission stated when adopting the Covered Clearing Agency Standards, 
using risk-based criteria helps to protect investors by limiting the 
participants of a covered clearing agency to those for which the 
covered clearing agency has assessed the likelihood of default.\51\ 
More specifically, the Commission believes that participant standards 
related to minimum capital requirements serve as one tool in limiting 
this default risk by ensuring that participants have sufficient capital 
to meet its obligations and to absorb losses.
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    \51\ See Securities Exchange Act Release No. 78961 (September 
28, 2016), 81 FR 70786, 70839 (October 13, 2016) (S7-03-14) 
(``Covered Clearing Agency Standards'').
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    Covered clearing agencies employ participant standards as the first 
line of defense in their risk management, ensuring that its 
participants, among other things, hold sufficient financial resources 
to meet the obligations that they may incur as a participant of the 
covered clearing agency. These requirements are separate from the 
collection of collateral (i.e., margin), which addresses the risk of 
the cleared transactions. Instead, capital requirements seek to ensure 
that DTC has sufficiently addressed the participant's counterparty 
credit risk, that is, that the participant has sufficient financial 
resources both to meet its collateral requirements or potential loss 
allocation in the event of a participant default; these requirements 
are not a substitute for margin.
    The Commission believes that DTC's proposal to increase its minimum 
capital requirements for its participants, as described above in 
Section II.A, is designed to strengthen its risk management practices. 
For most participants, the changes would increase the minimum capital 
requirements and ensure that certain participants, such as U.S. and 
foreign bank participants, would continue to hold sufficient financial 
resources consistent with those requirements and their applicable 
regulatory obligations, although they would not actually increase the 
amounts held as the participants generally meet the new requirements 
already based on their current capital.
    Through these changes, DTC should be able to ensure participants 
have sufficient capital to meet its obligations and to absorb losses, 
which could further limit the potential for a participant default. In 
turn, limiting the potential for a participant default should promote 
the prompt and accurate clearance and settlement of securities 
transactions. In addition, DTC's proposed minimum capital requirements 
would thereby further limit potential losses to non-defaulting 
participants in the event of a participant default, which helps assure 
the safeguarding of securities and funds which are in the custody or 
control of DTC.
    The Commission also considered other factors as support for its 
determination that these proposed minimum capital requirements are 
reasonable. The Commission understands that DTC has not revised these 
requirements in over 20 years. During that time, the Commission 
recognizes that there have been significant changes to the financial 
markets during that timeframe, such as new risks arising from cyber 
threats and online trading technologies, and heightened operational 
risk due to a more sophisticated and complex business environment. In 
addition, the Commission understands that DTC considered several 
factors, including inflation, historical development of the proposal, 
and the capital requirements of other financial market 
infrastructures.\52\ Finally, based on its supervisory experience, the 
Commission understands that trading volume, in terms of both number of 
transactions and notional value, have increased significantly during 
that time period.\53\
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    \52\ See supra note 43.
    \53\ See, e.g., DTCC Annual Reports, available at https://www.dtcc.com/about/annual-report, and CPMI-IOSCO Quantitative 
Disclosures for NSCC, section 23.1 (setting forth daily average 
volumes by asset class and average notional value), available at 
https://www.dtcc.com/legal/policy-and-compliance.
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    The Commission believes that these factors demonstrate the 
reasonableness of the proposed minimum capital requirements, as they 
would allow DTC to ensure that its participants have capital sufficient 
to address the risks posed by their activities in addition to the 
collateral for particular transactions. Further, the fact that the 
proposed requirements are consistent with those of other financial 
market infrastructures indicates that such requirements should address 
the obligations attendant to participating in a financial market 
infrastructure like DTC, while considering DTC's fully collateralized 
settlement model.
    Through these changes, DTC should be able to ensure participants 
have sufficient capital to meet their obligations and to absorb losses, 
which could further limit the potential for a participant default. In 
turn, limiting the potential for a participant default should promote 
the prompt and accurate clearance and settlement of securities 
transactions. In addition, DTC's proposed minimum capital requirements 
would thereby further limit potential losses to non-defaulting 
participants in the event of a participant default,\54\ which helps 
assure the safeguarding of securities and funds which are in the 
custody or control of DTC.
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    \54\ Under DTC's rules, when a participant defaults, DTC may 
allocate losses to non-defaulting participants in the event that the 
defaulting participant's own margin and other resources at DTC, as 
well as DTC's corporate contribution, are not sufficient to cover 
the loss. See Section 4 of Rule 4 of DTC's Rules, supra note 9. If 
members hold capital sufficient to allow them to meet their 
obligations to NSCC, such losses are less likely to occur.
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    Additionally, the Commission believes DTC's proposal to streamline 
its credit risk monitoring systems into one Watch List, as described 
above in Section II.B., would eliminate existing confusion and should 
enhance DTC's efficiency in monitoring its members' credit risk by 
focusing on only those participants that present heightened credit 
risk. Similarly, the Commission believes DTC's proposal to make 
clarifying and transparency changes, as described above in Section 
II.C., would remove ambiguity and ensure DTC's Rules are clear and 
accurate, which would help ensure DTC's participants understand its 
obligations to DTC and DTC's settlement activities. Therefore, the 
Commission believes these changes should promote the prompt and 
accurate clearance and settlement of securities transactions.
ii. Protection of Investors and the Public Interest
    The Commission believes that DTC's proposal to increase the capital 
requirements applicable to its participants would protect investors and 
the public interest.

[[Page 53811]]

    As discussed above in Section III.A.1, the Commission believes the 
proposal is designed to strengthen DTC's risk management practices. 
Because a defaulting member could place stresses on DTC with respect to 
DTC's ability to meet its settlement obligations upon which the broader 
financial system relies, it is important that DTC has strong 
participant requirements to ensure that its participants are able to 
meet their obligations. By reducing the risk of a participant default 
and any subsequent allocation of losses, the proposal should help to 
protect investors and the public interest by helping to ensure that 
investors' securities transactions are settled promptly and accurately 
and to assure the safeguarding of securities and funds which are in 
DTC's custody or control.
    For the reasons discussed in this Sections III.A., the Commission 
believes that the Proposed Rule Change is consistent with the 
requirements of Section 17A(b)(3)(F) of the Act.\55\
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    \55\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(4)

    Rule 17Ad-22(e)(4)(i) under the Act requires that a covered 
clearing agency establish, implement, maintain and enforce written 
policies and procedures reasonably designed to effectively identify, 
measure, monitor, and manage its credit exposures to participants and 
those arising from its payment, clearing, and settlement processes, 
including by maintaining sufficient financial resources to cover its 
credit exposure to each participant fully with a high degree of 
confidence.\56\
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    \56\ 17 CFR 240.17Ad-22(e)(4)(i).
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    Increasing participant capital requirements, as described above in 
Section II.A., would help ensure that participants maintain sufficient 
capital to meet their obligations to DTC, including potential future 
obligations required to fund its settlement activity with DTC or to 
absorb losses allocated to it. By ensuring participants' ability to 
meet their financial obligations to DTC, the proposal, in turn, will 
help ensure DTC continues to maintain sufficient financial resources to 
cover its credit exposure to each participant fully with a high degree 
of confidence.
    Additionally, the proposal to revise the Watch List, as described 
above in Section II.B, could help DTC better allocate its resources for 
monitoring its credit exposures to participants, which, in turn, could 
help DTC more effectively manage and mitigate its credit exposures to 
its participants. Therefore, the Commission finds the Proposed Rule 
Change is consistent with Rule 17Ad-22(e)(4)(i) under the Act.

C. Consistency With Rule 17Ad-22(e)(18)

    Rule 17Ad-22(e)(18) under the Act requires that a covered clearing 
agency establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to establish objective, risk-based, and 
publicly disclosed criteria for participation, which permit fair and 
open access by direct and, where relevant, indirect participants and 
other financial market utilities, require participants to have 
sufficient financial resources and robust operational capacity to meet 
obligations arising from participation in the clearing agency, and 
monitor compliance with such participation requirements on an ongoing 
basis.\57\
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    \57\ 17 CFR 240.17Ad-22(e)(18).
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    As described above in Section II.A., the proposal will increase 
DTC's minimum capital requirements for its participants. As it relates 
to U.S. and non-U.S. broker-dealer participants, the proposal will 
impose a flat excess net capital or equity capital requirement. 
Similarly, the proposal will establish specific minimum capital 
requirements for securities exchanges, central securities depositories, 
and settling banks based on analysis of the risk profiles of these 
entities and their importance to the functioning of the securities 
markets.
    For both U.S. and non-U.S. banks and trust companies that are 
banks, the proposal will revise how net capital is defined to 
incorporate a measurement used by banking regulators, and impose 
additional financial requirements on non-U.S. banks and trust companies 
who are banks tied to home country regulatory requirements and 
international standards. The proposal will also establish a category 
for all other participants, which will impose minimum financial 
requirements tied to that entity's regulatory requirements, which DTC 
may increase based on how closely it resembles another participant 
category and its risk-profile.
    First, the proposal to increase minimum capital requirements to 
DTC's participants will help to ensure each participant has and 
maintains sufficient financial resources to meet obligations arising 
from its participation in DTC. Second, the proposal will further 
establish objective, risk-based, and publicly disclosed criteria for 
setting the amounts of DTC's increased capital requirements for its 
participants. The proposed changes will apply to all DTC participants 
and set forth in DTC's public-facing Rules.\58\
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    \58\ The Commission also understands that DTC considered several 
additional factors, including inflation, historical development of 
the proposal, and the capital requirements of other financial market 
infrastructures. See Notice of Filing, supra note 3, at 74123; and 
supra note 37. The Commission believes that these factors 
demonstrate the reasonableness of the proposed minimum capital 
requirements, as discussed above in Section III.A.i.
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    Based on its review of the record, the Commission understands that 
DTC considered several additional risks faced by its participants, both 
qualitative and quantitative, in determining its proposed capital 
requirements, which the Commission believes demonstrate the 
reasonableness of the proposed minimum capital requirements, as 
discussed above in Section III.A.i.\59\ Regarding U.S. and non-U.S. 
banks and trust companies, the proposal will set the minimum capital 
requirements based on standards and measures used by banking 
regulators. Regarding non-U.S. broker-dealers and for all other types 
of participants, the proposal would eliminate conditional and 
discretionary minimum capital requirements in favor of establishing 
objective minimum capital requirements commensurate with the risks 
commensurate with the risks these participants pose to DTC. Therefore, 
the Commission concludes the proposal is reasonably designed to 
establish objective, risk-based, and publicly disclosed criteria for 
participation.
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    \59\ See supra text accompanying notes 59-60.
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    For the reasons described above, the Commission finds that the 
Proposed Rule Change is consistent with Rule 17Ad-22(e)(18) under the 
Act.\60\
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    \60\ 17 CFR 240.17Ad-22(e)(18).
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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 \61\ and 
the rules and regulations promulgated thereunder.
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    \61\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\62\ that proposed rule change SR-DTC-2021-017, be, and hereby is, 
approved.\63\
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    \62\ 15 U.S.C. 78s(b)(2).
    \63\ In approving the Proposed Rule Change, the Commission 
considered its impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).


[[Page 53812]]


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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\64\
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    \64\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-18859 Filed 8-31-22; 8:45 am]
BILLING CODE 8011-01-P