Notice2021-13912
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
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
June 30, 2021
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 86 Issue 123 (Wednesday, June 30, 2021)</title>
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[Federal Register Volume 86, Number 123 (Wednesday, June 30, 2021)]
[Notices]
[Pages 34807-34812]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-13912]
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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.
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\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).
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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.
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\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 <a href="https://www.dtcc.com/legal/rules-and-procedures">https://www.dtcc.com/legal/rules-and-procedures</a>. 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 <a href="https://www.dtcc.com/legal/rules-and-procedures">https://www.dtcc.com/legal/rules-and-procedures</a>. 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.
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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.
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\9\ See supra note 8.
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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\
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\10\ See Rule 2, Section 3, supra note 5.
\11\ See id.
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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\
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\12\ See Settlement Guide, supra note 6 at 3-4.
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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:
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\13\ See Rule 9(B), supra note 5.
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``[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.
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\14\ NYUCC Sec. 8-507(a).
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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\
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\15\ See NYUCC Sec. 9-106(a).
\16\ NYUCC Sec. 8-106.
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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''.
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\17\ See NYUCC Sec. 1-102.
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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:
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\18\ See NYUCC Sec. 8-106.
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``[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.
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\19\ See Rule 9(B), supra note 5.
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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.
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\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.
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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\
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\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.
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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:
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\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
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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:
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\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]
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Pledges.''
(c) Text included under the heading ``Pledges to the Options
Clearing Corporation'' \26\ would be revised as follows:
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\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
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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.
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\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).
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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.
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\29\ 15 U.S.C. 78q-1(b)(3)(F).
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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\
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\30\ Id.
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(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.
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\31\ 15 U.S.C 78s(b)(3)(A).
\32\ 17 CFR 240.19b-4(f).
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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
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#bbc9ced7de96d8d4d6d6ded5cfc8fbc8ded895dcd4cd"><span class="__cf_email__" data-cfemail="85f7f0e9e0a8e6eae8e8e0ebf1f6c5f6e0e6abe2eaf3">[email protected]</span></a>. Please include
File Number SR-DTC-2021-005 on the subject line.
Paper Comments
<bullet> 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 (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
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
(<a href="http://dtcc.com/legal/sec-rule-filings.aspx">http://dtcc.com/legal/sec-rule-filings.aspx</a>). 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.
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\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
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</html>Indexed from Federal Register on June 30, 2021.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.