[Federal Register Volume 89, Number 215 (Wednesday, November 6, 2024)]
[Notices]
[Pages 88078-88080]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-25726]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101486; File No. SR-DTC-2024-010]
Self-Regulatory Organizations; The Depository Trust Company;
Order Approving of Proposed Rule Change To Decommission the ID Net
Service
October 31, 2024.
I. Introduction
On September 12, 2024, The Depository Trust Company (``DTC'') filed
with the Securities and Exchange Commission (``Commission'') proposed
rule change SR-DTC-2024-010 (``Proposed Rule Change'') pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\
and Rule 19b-4 thereunder,\2\ to decommission the ID Net service (``ID
Net Service'' or ``ID Net'').\3\ The Proposed Rule Change was published
for comment in the Federal Register on September 27, 2024.\4\ The
Commission has received no comments on the Proposed Rule Change. For
the reasons discussed below, the Commission is approving the Proposed
Rule Change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Capitalized terms not defined herein are defined in the
Rules, By-Laws and Organization Certificate of DTC (``Rules'') and
the DTC Settlement Service Guide (``Settlement Guide''), available
at https://www.dtcc.com/legal/rules-and-procedures.aspx.
\4\ See Securities Exchange Act Release No. 101132 (Sept. 23,
2024), 89 FR 79320 (Sept. 27, 2024) (File No. SR-DTC-2024-010)
(``Notice of Filing'').
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II. 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 ID Net Service is a joint
service offering of DTC and its affiliate, National Securities Clearing
Corporation (``NSCC''), available on a voluntary basis to broker/
dealers that are participants of both NSCC and DTC and banks that are
participants of DTC.\6\ ID Net allows broker/dealer users to net their
affirmed institutional transactions (``Affirmed Transactions'') with
their transactions in NSCC's Continuous Net Settlement
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(``CNS'') system.\7\ An institutional transaction is one between a
broker/dealer and its institutional customer. Such institutional
customers are not Participants of DTC. Unlike exchange trades and most
prime broker trades, most institutional delivery transactions do not
currently flow through CNS but instead settle at DTC on a trade-for-
trade basis.\8\ DTC may accept Affirmed Transactions submitted by a
utility that provides a matching service (``Matching Utility'').\9\ The
counterparties on an Affirmed Transaction submitted by a Matching
Utility to DTC are a (i) DTC Participant, acting as clearing broker to
the Affirmed Transaction and a (ii) DTC Participant bank, acting as the
custodian for an institutional customer. The Affirmed Transaction is
processed on a trade-for-trade basis at DTC, unless it is designated
for ID Net processing by the Matching Utility and meets certain
eligibility requirements.
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\5\ See The Depository Trust Company, Disclosure Framework for
Covered Clearing Agencies and Financial Market Infrastructures (Mar.
2023) (``Disclosure Framework''), available at https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/DTC_Disclosure_Framework.pdf.
\6\ NSCC also filed a proposed rule change with the Commission
in connection with decommissioning the ID Net Service. See
Securities Exchange Act Release No. 101131 (Sept. 23, 2024), 89 FR
79324 (Sept. 27, 2024) (File No. SR-NSCC-2024-008).
\7\ CNS is NSCC's system for accounting and settling CNS-
eligible securities. See NSCC Rule 11 (describing the CNS System)
and Procedure VII (describing the CNS Accounting Operation),
available at www.dtcc.com/-/media/Files/Downloads/legal/rules/nscc_rules.pdf. To be CNS-eligible, a security must be eligible for
book-entry transfer on the books of DTC and must be capable of being
processed in the CNS system. All eligible compared and recorded
transactions for a particular settlement date are netted by issue
into one net long (buy), net short (sell) or flat position for each
Member, and those positions are further netted with positions of the
same issue that remain open after their originally scheduled
settlement date. As central counterparty, NSCC becomes the contra-
party for settlement purposes, assuming the obligation of its
Members that are receiving securities to receive and pay for those
securities and the obligation of Members that are delivering
securities to make the delivery. CNS netting thus reduces the number
of securities movements required to settle transactions.
\8\ See DTC Settlement Guide, supra note 3.
\9\ The Matching Utility must be (i) a clearing agency
registered with the Commission, (ii) an entity that has obtained an
exemption from such registration from the Commission, or (iii) a
``qualified vendor'' for trade confirmation/affirmation services as
defined by the rules of a self-regulatory organization. See DTC
Settlement Guide, supra note 3, at 40. TCC ITP Matching (US) LLC
(``ITP''), a DTC and NSCC affiliate, is currently the only Matching
Utility that submits Affirmed Transactions to DTC. See Notice of
Filing, supra note 4, at 79320 n.8.
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In order for an Affirmed Transaction to be eligible for processing
in ID Net, (i) both counterparties to the Affirmed Transaction must be
a Member of NSCC and a Participant of DTC, or a bank that is a
Participant of DTC, that has subscribed to ID Net; and (ii) the
transaction must be (a) in a security eligible for processing through
NSCC's CNS and (b) affirmed within established timeframes set forth in
the Settlement Guide.\10\
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\10\ See Settlement Guide, supra note 3, at 40-41.
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If an Affirmed Transaction is designated for ID Net and meets the
eligibility criteria, then DTC will direct the transaction to ID Net,
which facilitates the netting of a broker/dealer's side of an Affirmed
Transaction with that broker/dealer's CNS activity, via omnibus
accounts that are maintained by NSCC at DTC and designated for ID Net
activity. If a bank is a counterparty to the ID Net-eligible Affirmed
Transaction, then it will either receive or deliver the subject shares
versus payment, on a trade-for-trade basis, via the ID Net omnibus
accounts.
While ID Net allows broker/dealers to realize the benefit of
netting for Affirmed Transactions by allowing the broker/dealer to net
its ID Net-eligible Affirmed Transactions with its transactions in CNS,
banks using ID Net settle ID Net transactions on a trade-for-trade
basis as they would for other Affirmed Transactions. In this regard,
DTC states that ID Net's main benefit is to streamline clearance and
settlement of ID Net-eligible Affirmed Transactions for broker/
dealers.\11\
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\11\ See Notice of Filing, supra note 4, at 79321.
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III. Description of the Proposed Rule Change
DTC states that as part of DTC's and NSCC's continuous evaluations
to the efficiency and effectiveness of the services they provide and in
order to streamline and simplify their services and processes, DTC and
NSCC have identified ID Net as an underused service that may be
eliminated as part of modernization efforts.\12\ They each propose to
decommission the ID Net Service due to factors including: (i) limited
uptake and usage of the service since its adoption; and (ii) the
operational complexity of maintaining the service, which also connects
with and impacts other core clearance and settlement processes.\13\
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\12\ Id.
\13\ DTC states that this complexity includes (i) special
eligibility checks versus the ID Net eligibility criteria and (ii)
leveraging of the omnibus accounts to simultaneously allow (a) a
bank to process ID Net-eligible transactions on a trade-for-trade
basis and (b) the broker/dealer side of an ID Net-eligible
transaction to settle via CNS. Notice of Filing, supra note 4, at
79321 n.12.
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To implement the proposed change, DTC proposes removing all
provisions relating to ID Net from the Settlement Guide, including (i)
the entire text of the section titled ``ID Net,'' which contains the
DTC Procedures for processing of ID Net transactions,\14\ and (ii) a
reference to ID Net relating to messaging in the section titled
``Affirmed Transactions.'' \15\
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\14\ See Settlement Guide, supra note 3, at 40-46.
\15\ Id. at 38.
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In addition, DTC proposes removing the associated ID Net Fee of 2
cents per transaction from the Guide to the DTC Fee Schedule (``Fee
Guide'') \16\ because the fee would be obsolete without the ID Net
Service. Instead, such transactions would, by default, be charged the
standard fee charged for Affirmed Transactions of 4 cents per
transaction.\17\
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\16\ See Fee Guide, available at www.dtcc.com/~/media/Files/
Downloads/legal/fee-guides/DTC-Fee-Schedule.pdf.
\17\ Id.
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DTC believes that the decommission of the ID Net Service would have
minimal impact on its Participants, as only 13 broker/dealers and 20
banks are subscribed to the ID Net Service and the service is not used
by all of those broker/dealers and banks.\18\ Furthermore, without ID
Net, Affirmed Transactions can simply settle trade-for-trade, directly
between the counterparties like they already do.
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\18\ DTC states that ID Net-related transactions currently
comprise less than 1 percent of all activity processed by CNS. DTC
believes that ID Net usage has been limited since its implementation
in 2008 because, in part, the service needs both parties to an ID
Net transaction to be subscribers of ID Net, which is not always the
case. See Notice of Filing, supra note 4, at 79321 n.11.
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DTC states that it has performed direct outreach to Participants
that use the ID Net Service and has also announced its plans to
decommission the ID Net Service in an Important Notice, and that there
have been no material objections or concerns raised by
Participants.\19\
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\19\ See Notice of Filing, supra note 4, at 79321; see also DTC
Important Notice regarding decommission of the ID Net Service,
available at https://www.dtcc.com/-/media/Files/pdf/2023/8/8/18852-23.pdf.
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IV. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act \20\ directs the Commission to
approve a proposed rule change of a self-regulatory organization if it
finds that such proposed rule change is consistent with the
requirements of the Act and rules and regulations thereunder applicable
to such organization. After 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 Section 17A(b)(3)(F) of the
Act.\21\
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\20\ 15 U.S.C. 78s(b)(2)(C).
\21\ 15 U.S.C. 78q-1(b)(3)(F).
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A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act requires that the rules of a
clearing
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agency, such as DTC, be designed to, among other things, promote the
prompt and accurate clearance and settlement of securities
transactions.\22\ The Commission believes that the Proposed Rule Change
is consistent with Section 17A(b)(3)(F) of the Act for the reasons
stated below.
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\22\ Id.
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The Proposed Rule Change would amend the Settlement Guide to
reflect the decommission of ID Net and remove the ID Net Fee from the
Fee Guide. As discussed in Parts II and III, ID Net is an underused
service that is operationally complex to maintain, and its main benefit
is to broker/dealers' streamline clearance and settlement of ID Net-
eligible Affirmed Transactions, which may otherwise settle on a trade-
for-trade basis. As such, ID Net's decommission would have minimal
impact on DTC and its Participants considering its limited usage.
Affirmed Transactions that would have otherwise been directed to ID Net
will settle trade-for-trade directly between counterparties, like most
other Affirmed Transactions currently do. Therefore, these transactions
will continue to settle promptly and accurately, as other Affirmed
Transactions do, outside of the ID Net Service. For these reasons, the
Commission finds that the Proposed Rule Change should continue to
support DTC's ability to provide prompt and accurate clearance and
settlement of securities transactions, consistent with Section
17A(b)(3)(F) of the Act.\23\
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\23\ Id.
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V. 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 \24\
and the rules and regulations promulgated thereunder.
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\24\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\25\ that proposed rule change SR-DTC-2024-010, be, and hereby is,
approved.\26\
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\25\ 15 U.S.C. 78s(b)(2).
\26\ In approving the Proposed Rule Change, the Commission
considered its 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.\27\
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\27\ 17 CFR 200.30-3(a)(12).
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Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-25726 Filed 11-5-24; 8:45 am]
BILLING CODE 8011-01-P