Notice2021-22439
Self-Regulatory Organizations; Depository Trust Company; Order Approving the Proposed Rule Change Relating to Confidential Information, Market Disruption Events, and Other Changes
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
October 14, 2021
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 86 Issue 196 (Thursday, October 14, 2021)</title>
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[Federal Register Volume 86, Number 196 (Thursday, October 14, 2021)]
[Notices]
[Pages 57221-57226]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-22439]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93279; File No. SR-DTC-2021-011]
Self-Regulatory Organizations; Depository Trust Company; Order
Approving the Proposed Rule Change Relating to Confidential
Information, Market Disruption Events, and Other Changes
October 8, 2021.
I. Introduction
On June 25, 2021, Depository Trust Company (``DTC'') filed with the
Securities and Exchange Commission (``Commission'') proposed rule
change SR-DTC-2021-011 (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\ to amend DTC's rules relating to
confidentiality requirements, Market Disruption Events, and procedures
for disconnecting a participant from DTC's network, among other
changes.\3\ The Proposed Rule Change was published for comment in the
Federal Register on July 13, 2021.\4\ The Commission received comments
that it has considered with respect to the Proposed Rule Change.\5\ 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\ See Notice of Filing, infra note 4, at 86 FR 36833.
\4\ See Securities Exchange Act Release No. 92342 (June 25,
2021), 86 FR 36833 (July 13, 2021) (File No. SR-DTC-2021-011)
(``Notice of Filing'').
\5\ See id. The comment letters are available on the
Commission's website at <a href="https://www.sec.gov/comments/sr-dtc-2021-011/srdtc2021011.htm">https://www.sec.gov/comments/sr-dtc-2021-011/srdtc2021011.htm</a>. Several comments generally supported the
Proposed Rule Change, and the Commission considers the additional
comments in its analysis at Section III infra.
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II. Description of the Proposed Rule Change
Pursuant to the Proposed Rule Change, DTC is proposing three main
changes to its Rules, Bylaws, and Organization Certificate(``Rules''):
\6\ (1) Standardizing the confidentiality requirement applicable to DTC
with respect to its participants' information and adding
confidentiality requirement applicable to participants with respect to
DTC's information, (2) updating its Market Disruption and Force Majeure
Rule (``Force Majeure Rule'') to authorize two additional officers to
determine that a Market Disruption Event has occurred, and (3) adding a
new rule setting forth the procedures under which DTC would be able to
disconnect a participant from its network in certain circumstances
(``Systems Disconnect Rule''). The Commission provides relevant
background and describes each of these proposed changes in greater
detail below.
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\6\ Capitalized terms not defined herein are defined in the
Rules, available at https://www.dtcc.com/~/media/Files/Downloads/
legal/rules/dtc_rules.pdf.
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A. Background
DTC serves as the central securities depository for substantially
all corporate and municipal debt and equity securities available for
trading in the United States.\7\ DTC provides depository services and
asset servicing for a wide
[[Page 57222]]
range of security types such as money market instruments, equities,
warrants, rights, corporate debt and notes, municipal bonds, government
securities, asset-backed securities, and collateralized mortgage
obligations.\8\ DTC's custodial services include the safekeeping,
record keeping, book entry transfer, and pledge of securities among its
Participants and Pledgees.\9\ DTC also provides services to securities
issuers, such as maintaining current ownership records and distributing
payments to shareholders.\10\ In light of DTC's critical role in the
marketplace, DTC was designated a Systemically Important Financial
Market Utility (``SIFMU'') under Title VIII of the Dodd-Frank Wall
Street Reform and Consumer Protection Act of 2010.\11\ Due to DTC's
unique position in the marketplace, a failure or a disruption to DTC
could, among other things, increase the risk of significant liquidity
problems spreading among financial institutions or markets, and thereby
threaten the stability of the financial system in the United
States.\12\
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\7\ See Financial Stability Oversight Counsel 2012 Annual
Report, Appendix A (``FSOC 2012 Report''), available at <a href="http://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf">http://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf</a>.
\8\ Id.
\9\ Id.
\10\ Id.
\11\ 12 U.S.C. 5465(e)(1). See FSOC 2012 Report, supra note 5.
\12\ See FSOC 2012 Report, supra note 5.
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DTC participants connect to DTC's systems, either directly through
the Securely Managed and Reliable Technology (``SMART'') network or
through a third party service provider or service bureau.\13\ DTC's
parent company, The Depository Trust & Clearing Corporation (``DTCC'')
manages the SMART network, which connects a nationwide complex of
networks, processing centers, and control facilities.\14\
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\13\ See Securities Exchange Act Release No. 87698 (December 9,
2019), 84 FR 68269 (December 13, 2019) (File No. SR-DTC-2019-008)
(describing the DTCC SMART network).
\14\ DTCC provides a set of core business processes for DTC and
DTCC's other subsidiaries, including the technology systems and
networks, that provide connectivity between DTC and its participants
and that provide DTC with the ability to provide its services as
required under the Rules. Most corporate functions are established
and managed on an enterprise-wide basis pursuant to intercompany
agreements under which it is generally DTCC that provides services
to DTC and DTCC's other subsidiaries.
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B. Proposed Changes
1. Confidentiality Requirements
Confidentiality Requirements Applicable to DTC: DTC collects
confidential information from its participants to assess whether each
participant meets DTC's membership requirements either to gain or
continue access to DTC's depository, custodial and settlement services
(hereinafter collectively, settlement services).\15\ In turn, DTC is
required to maintain the confidentiality of any information furnished
by its participants. Currently, DTC's Rules obligate DTC to hold
participants' information in the same degree of confidence as may be
required by law or the rules and regulations (hereinafter collectively,
``regulations'') of the appropriate regulatory body having jurisdiction
over the participant.\16\
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\15\ See Rule 2, supra note 4 (establishing DTC's right to
require applicants to furnish information to become Participants or
Pledgees of DTC and to require participants to furnish information
relating to assurances of financial responsibility and operational
capability).
\16\ See Section 1 of Rule 2, supra note 4.
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DTC states that its current Rules create ambiguity because DTC's
obligations depend on each participant's regulatory requirements, which
could lead to unequal treatment of participants and conflicts of law
with DTC's regulatory requirements or with respect to a participant who
is subject to multiple jurisdictions' regulations.\17\ DTC also states
that applying different standards creates operational burdens because
DTC must track the regulations applicable to each of its participants
and must maintain the confidentiality of each participant's information
to the same degree as required by the applicable regulations.\18\
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\17\ See Notice of Filing, supra note 4, at 36833-34.
\18\ See id.
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In order to clarify its confidentiality requirements and to enhance
its operational efficiency, DTC proposes to revise its Rules to
establish a standard, which will require DTC to hold participant
confidential information to the same degree as DTC's regulatory
requirements that relate to the confidentiality of records, and to
remove the references to each participant's particular regulatory
obligations. DTC represents that the proposed change would provide
participants with similar protections because DTC believes its
regulatory requirements are comparable to the regulations applicable to
its participants and, therefore, would not result in changes to DTC's
current practices or the protection offered to its participants'
confidential information.\19\
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\19\ See id. at 36834.
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Confidentiality Requirements Applicable to Participants: DTC's
Rules do not include obligations for its participants to protect
confidential information furnished by DTC or its affiliates.\20\
However, DTC states that, in connection with the development of cyber
and information security programs pursuant to applicable participant
regulatory requirements, DTC and DTCC have received an increasing
number of requests from participants for confidential information, such
as information regarding DTCC's network operations, data security
practices, and legal settlements.\21\ Additionally, DTC states that
participants may request DTC or DTCC to disclose confidential
information regarding its cyber threat indicators, sources of cyber
threat information, or other information and actions taken following a
cyber incident relating to a participant, DTC, or DTCC.\22\
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\20\ DTC states that, historically, it has generally not
provided, nor been requested to provide, information that contains
confidential or proprietary information of DTC or its affiliates to
its participants except for information necessary for participants
to connect to DTCC Systems, which is typically protected under
intellectual property laws. See id.
\21\ See id. See also, supra discussion in Section II.A
(Background) relating to DTCC Systems.
\22\ See id.
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To facilitate information sharing by DTC while protecting the
confidentiality of proprietary and confidential information DTC shares
with its participants, DTC proposes to add participant confidentiality
requirements to its Rules. The new provisions will require participants
to maintain the confidentiality of information furnished by DTC through
proper safeguards to prevent disclosure of such confidential
information, except as necessary to perform its obligations under DTC's
Rules or as otherwise required by applicable law. DTC proposes that
participants be required to maintain the confidentiality of this
information to the same extent and using the same means the participant
uses to protect its own confidential information, but no less than a
reasonable standard of care. DTC's proposal will also entitle DTC or
DTCC to seek any temporary or permanent injunctive or other equitable
relief in addition to any monetary damages under the Rules if a
participant breaches its confidentiality requirements. Additionally,
DTC's proposal will entitle DTC to impose other disciplinary
proceedings or restrictions on access to services for a participant's
failure to comply with its confidentiality requirements, consistent
with the existing tools available to DTC regarding a participant's
failure to comply with its Rules.
2. Market Disruption Event
DTC's Rules contain provisions that identify the events or
circumstances that DTC would consider to be a Market Disruption Event,
including, for
[[Page 57223]]
example, events that lead to the suspension or limitation of trading or
banking in the markets in which DTC operates, or the unavailability or
failure of any material payment, bank transfer, wire or securities
settlement systems.\23\ Upon the declaration of a Market Disruption
Event, DTC's Rules provide DTC with tools to address such an event,
such as suspending any or all services and taking, or requiring
participants to take, any actions DTC considers appropriate to
facilitate the continuation of DTC's services.\24\
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\23\ See Rule 38, supra note 6. See also Securities Exchange Act
Release Nos. 83953 (August 27, 2018), 83 FR 44381 (August 30, 2018)
(File No. SR-DTC-2017-803); 83972 (August 28, 2018), 83 FR 44964
(September 4, 2018) (File No. SR-DTC-2017-021).
\24\ See Rule 38, supra note 6.
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Currently, DTC's Board of Directors may declare a Market Disruption
Event and may take any actions authorized by DTC's Rules to address the
event.\25\ However, DTC's Rules also authorize certain officers to make
an interim declaration of a Market Disruption Event, to allow DTC to
prevent delays in addressing a Market Disruption Event if the Board of
Directors is unable to convene.\26\ In the event of such an interim
declaration, the Board of Directors must ratify, modify, or rescind the
officer's determination as soon as practicable.\27\ Currently, the
officers authorized to make such determination are the Chief Executive
Officer, Chief Financial Officer, Group Chief Risk Officer, and General
Counsel.\28\
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\25\ See Section 2 of Rule 38, id.
\26\ See id.
\27\ See id.
\28\ See id.
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DTC proposes to add two additional officers of DTC, the Chief
Information Officer and the Head of Clearing Agency Services, to the
list of authorized officers that could make such an interim
determination if the Board of Directors is unable to convene. DTC
states these two officers, like the other officers currently provided
in the Rules, maintain senior executive level positions at DTC, oversee
divisions of DTC, and hold positions at DTC that would provide them a
necessary global view into DTC's operations and systems to enable them
to determine the existence of a Market Disruption Event.\29\ DTC states
adding these two additional officers would facilitate DTC's ability to
implement its emergency procedures in the event of a Market Disruption
Event.\30\
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\29\ See Notice of Filing, supra note 4, at 36834.
\30\ See id.
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3. Systems Disconnect Rule
As mentioned above in Section II.A (Background), DTC's participants
connect to DTC's systems, either through the DTCC-managed SMART network
or through other electronic means, such as through a third party
service provider or service bureau. DTC's Rules do not address DTC's
ability to disconnect a participant whose network connection risks
harming DTC's systems. DTC's proposal will establish procedures under
which DTC would be able to disconnect a participant from its network
due to the risk of an imminent threat to DTC, participants, or other
market participants.\31\
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\31\ See Notice of Filing, supra note 4, at 36834-35.
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DTC's proposal will address DTC's authority to take certain actions
upon the occurrence, and during the pendency, of a Major Event. A
``Major Event'' will be defined as the happening of one or more
``Systems Disruptions'' reasonably likely to have a significant impact
on DTC's operations, including ``DTCC Systems,'' \32\ that affect the
business, operations, safeguarding of securities or funds, or physical
functions of DTC, its participants, or other market participants.
``Systems Disruption'' will, in turn, be defined as the unavailability,
failure, malfunction, overload, or restriction (whether partial or
total) of a DTCC Systems Participant's systems that disrupts or
degrades the normal operation of such DTCC Systems Participant's
systems; or anything that impacts or alters the normal communication or
the files that are received, or information transmitted, to or from the
DTCC Systems.
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\32\ ``DTCC Systems'' will be defined as the systems, equipment
and technology networks of DTCC, DTC and/or their Affiliates,
whether owned, leased, or licensed, software, devices, IP addresses
or other addresses or accounts used in connection with providing the
services set forth in the Rules, or used to transact business or to
manage the connection with DTC.
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DTC's proposal would also provide governance procedures applicable
to DTC's determination whether, and how, to implement the provisions of
the Systems Disconnect Rule. The same officers with delegated authority
under the Force Majeure Rule may make a determination that a Major
Event has occurred. As discussed in Section II.B.2 (Market Disruption
Event) above, DTC states these officers maintain senior executive level
positions at DTC, oversee divisions of DTC, and hold positions at DTC
that would provide them a necessary global view into DTC's operations
and systems to enable them to determine the existence of a Market
Disruption Event, which would also enable them to determine the
existence of a Major Event.
However, the proposed process for declaring a Major Event, by
contrast, would start with a designated officer, whereas, for a Market
Disruption Event, the officer would make an interim determination only
if the Board of Directors were unable to timely convene. DTC states it
designed the process in this way to improve its ability to respond
quickly, efficiently, and effectively to a Major Event that arises
abruptly.\33\ Following this determination, any management committee
including all of the officers authorized to determine a Major Event
would convene, and DTC would convene a Board of Directors meeting as
soon as practicable thereafter, and in any event within five Business
Days following such determination, to ratify, modify, or rescind the
Officer Major Event Action.\34\
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\33\ See Notice of Filing, supra note 4, at 36835.
\34\ See id.
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In addition, the proposed rule will require participants to notify
DTC immediately upon becoming aware of a Major Event, and, likewise,
will require DTC to notify its participants promptly of any action DTC
takes or intends to take with respect to a Major Event.\35\ Finally,
the proposal will address certain miscellaneous related matters
including: (i) A limitation of liability for any failure or delay in
performance, in whole or in part of DTC's obligations under the Rules,
arising out of or related to a Major Event, (ii) a statement that DTC's
power to take any action pursuant to the Systems Disconnect Rule also
includes the power to repeal, rescind, revoke, amend or vary such
action, (iii) a statement that DTC's powers pursuant to the Systems
Disconnect Rule shall be in addition to, and not in derogation of,
authority granted elsewhere in the Rules to take action as specified
therein, (iv) a requirement that participants shall keep any
confidential information provided to them by DTC in connection with a
Major Event confidential, and (v) a statement that in the event of any
conflict between the provisions of the Systems Disconnect Rule and any
other Rules or Procedures, the provisions of the Systems Disconnect
Rule would prevail.
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\35\ See id.
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[[Page 57224]]
III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act \36\ directs the Commission to
approve a proposed rule change of a self-regulatory organization if it
finds that such proposed rule change is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to such organization. After careful consideration, the
Commission finds that the Proposed Rule Change is consistent with the
requirements of the Act and the rules and regulations applicable to
DTC. In particular, the Commission finds that the Proposed Rule Change
is consistent with Section 17A(b)(3)(F) \37\ of the Act and Rules 17Ad-
22(e)(1),\38\ (e)(2),\39\ and (e)(17)(i) \40\ thereunder.
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\36\ 15 U.S.C. 78s(b)(2)(C).
\37\ 15 U.S.C. 78q-1(b)(3)(F).
\38\ 17 CFR 240.17Ad-22(e)(1).
\39\ 17 CFR 240.17Ad-22(e)(2).
\40\ 17 CFR 240.17Ad-22(e)(17)(i).
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A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) \41\ of the Exchange Act requires, in part,
that the rules of a clearing agency, such as DTC, be designed, in part,
to promote the prompt and accurate clearance and settlement of
securities transactions and to assure the safeguarding of securities
and funds which are in the custody or control of the clearing agency or
for which it is responsible. The Commission finds that the Proposed
Rule Change is consistent with Section 17A(b)(3)(F) of the Act \42\ for
the reasons discussed below.
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\41\ 15 U.S.C. 78q-1(b)(3)(F).
\42\ Id.
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As described above in Section II.B.1 (Confidentiality
Requirements), DTC proposes to revise its Rules to establish a standard
relating to DTC's obligation to maintain the confidentiality of
information it collects from participants to assess each participant's
compliance with DTC's membership requirements. The Commission believes
such a uniform standard will help DTC meet its obligations and will
help each participant better understand DTC's obligations for
maintaining the confidential information it shares with DTC, which, in
turn, may facilitate the sharing of such information and improve DTC's
ability to evaluate its participants' eligibility to access DTC's
settlement services.
Also, as described above in Section II.B.1 (Confidentiality
Requirements), DTC proposes to add participant confidentiality
requirements to its Rules to ensure participants maintain the
confidentiality of information DTC shares, which participants may then
use to determine whether to participate in DTC's settlement services by
understanding DTC system requirements and DTC system safeguards. The
Commission believes participant confidentiality requirements will help
each participant better understand its rights and obligations for
maintaining the confidential information DTC shares, which, in turn,
may facilitate participant compliance. Therefore, the Commission
believes the proposed changes to DTC and participant confidentiality
requirements are consistent with promoting the prompt and accurate
settlement of securities transactions by DTC.
As described above in Section II.B.2 (Market Disruption Event) and
Section II.B.3 (Systems Disconnect Rule), risks, threats, and potential
vulnerabilities due to a Market Disruption Event or a Major Event could
impede DTC's ability to provide its settlement services. DTC proposes
to add two officers authorized to make an interim determination that a
Market Disruption Event has occurred if the Board of Directors is
unable to timely convene. The Commission believes the proposed change
will improve DTC's ability to respond quickly to a Market Disruption
Event, which could help DTC mitigate the impact of such event on DTC,
its participants, and the broader market.
Additionally, as described above in Section II.B.3 (Systems
Disconnect Rule), DTC proposes to add the Systems Disconnect Rule,
which will set forth the procedures under which DTC would be
authorized, upon the occurrence of a Major Event (as defined in the
proposed rules), to take certain actions, including disconnecting a
participant from DTC's systems, suspending data transmissions between
DTC and the participant, and requiring the participant to take other
actions necessary to protect DTC and its participants. The Commission
believes the proposed Systems Disconnect Rule will enable DTC to
respond quickly to a potential cyber threat or other network
disruption, which could help DTC prevent the spread of a participant's
systems disruptions to DTC, its participants, and other market
participants that could otherwise cause losses to DTC or its
participants.
One commenter suggests certain revisions to the definition of Major
Event so that certain terms in the Systems Disconnect Rule are
consistent with the definition of Market Disruption Event in the Force
Majeure Rule.\43\ The Commission disagrees. Consistency between the
Systems Disconnect Rule and Force Majeure Rule is not necessary because
DTC designed the Systems Disconnect Rule for a different purpose.
Although both rules relate to events that, if left unaddressed, could
affect DTC's ability to provide settlement services, the Force Majeure
Rule is designed to cover events caused by external forces that impact
DTC and its participants, whereas the Systems Disconnect Rule is
designed only to cover disruptions to participant's computer systems or
network that could flow through to DTC systems. Therefore, differences
between the two rules do not raise consistency concerns, because of
their different purposes.\44\
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\43\ See letter from Anonymous, dated July 28, 2021, supra note
5.
\44\ The commenter also suggests adding language to the end of
the Major Event definition to indicate that, to avoid doubt, a Major
Event would not include disruptions due to normal market forces. The
Commission does not believe that such additional language is
necessary because, as discussed above in Section II.B.3 (Systems
Disconnect Rule), a Major Event is limited to one or more ``Systems
Disruption(s)'' (as defined in the proposed rule), which is properly
limited to disruptions to participant systems or its network
connection.
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Therefore, for the reasons described above, the Commission believes
the proposed changes relating to a Market Disruption Event or a Major
Event will help promote the prompt and accurate clearance and
settlement of securities transactions and with assuring DTC safeguards
securities and funds that are in its custody or control or for which it
is responsible. Accordingly, the Commission finds that the
implementation of the Proposed Rule Change is consistent with Section
17A(b)(3)(F) of the Act.\45\
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\45\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(1)
Rule 17Ad-22(e)(1) under the Exchange Act requires that a covered
clearing agency establish, implement, maintain and enforce written
policies and procedures reasonably designed to provide for a well-
founded, clear, transparent and enforceable legal basis for each aspect
of its activities in all relevant jurisdictions.\46\ The Commission
finds that the Proposed Rule Change is consistent with Rule 17Ad-
22(e)(1) of the Exchange Act \47\ for the reasons discussed below.
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\46\ 17 CFR 240.17Ad-22(e)(1).
\47\ Id.
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As described above in Sections II.B.1 (Confidentiality
Requirements) and II.B.2 (Market Disruption Event), DTC proposes to
establish a consistent standard for its obligation to maintain the
confidentiality of information it collects from its participants and to
[[Page 57225]]
establish participant confidentiality requirements. The Commission
believes a consistent standard for DTC's confidentiality requirements
will provide for clear and transparent standard rules for participants,
rather than maintaining potentially different confidentiality standards
for participants based on the various, unrelated regulatory bodies
governing those participants. Additionally, the Commission believes
that imposing specific legal standards applicable to both DTC and its
participants to follow will provide for a well-founded legal basis for
the sharing and maintaining of confidential information between DTC and
its participants.\48\
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\48\ One commenter suggests adding an exception for negligence
or fraud to the limitation of liability clause in the proposed
Systems Disconnect Rule, which the commenter states is customary
contractual language. See letter from Anonymous, dated July 28,
2021, supra note 5. The Commission notes DTC has already included
similar language in its Rules, which would be applicable to this
aspect of the proposal. See Rule 6, supra note 6 (providing for DTC
liability to its participants for ``gross negligence, willful
misconduct, or violations of Federal securities laws for which there
is a private right of action'', which is not limited by the proposed
Rule 38A pursuant to section 5).
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Accordingly, the Commission finds that the implementation of the
Proposed Rule Change is consistent with Rule 17Ad-22(e)(1) of the
Exchange Act.\49\
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\49\ 17 CFR 240.17Ad-22(e)(1).
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C. Consistency With Rule 17Ad-22(e)(2)
Rule 17Ad-22(e)(2) under the Exchange Act requires, in part, that a
covered clearing agency establish, implement, maintain and enforce
written policies and procedures reasonably designed to provide for
governance arrangements that are clear and transparent and that specify
clear and direct lines of responsibility.\50\ The Commission finds that
the Proposed Rule Change is consistent with Rule 17Ad-22(e)(2) of the
Exchange Act \51\ for the reasons discussed below.
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\50\ 17 CFR 240.17Ad-22(e)(2).
\51\ Id.
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The Commission believes DTC's proposal, as described above in
Section II.B.2 (Market Disruption Event), to add two officers
authorized to make an interim determination of a Market Disruption
Event if the Board of Directors is unable to convene in a timely manner
provides for governance arrangements that are clear and transparent and
that provide clear and direct lines of responsibility. Likewise, the
Commission believes DTC's proposal to identify the officers authorized
to make an interim determination of a Major Event, which will then be
ratified, modified, or rescinded by the management committee and the
Board of Directors will provide for clear and transparent governance
procedures and will specify clear and direct lines of responsibility.
Accordingly, the Commission finds that the implementation of the
Proposed Rule Change is consistent with Rule 17Ad-22(e)(2) of the
Exchange Act.\52\
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\52\ Id.
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D. Consistency With Rule 17Ad-22(e)(17)(i)
Rule 17Ad-22(e)(17)(i) under the Exchange Act requires that a
covered clearing agency establish, implement, maintain and enforce
written policies and procedures reasonably designed to manage the
covered clearing agency's operational risks by identifying the
plausible sources of operational risk, both internal and external, and
mitigating their impact through the use of appropriate systems,
policies, procedures, and controls.\53\ The Commission finds that the
Proposed Rule Change is consistent with Rule 17Ad-22(e)(17)(i) of the
Exchange Act \54\ for the reasons discussed below.
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\53\ 17 CFR 240.17Ad-22(e)(17)(i).
\54\ Id.
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The Commission believes DTC's proposal, as described above in
Section II.B.2 (Market Disruption Event), to add two officers
authorized to make an interim determination of a Market Disruption
Event could help DTC mitigate the impact of a Market Disruption Event
by ensuring DTC can respond quickly to such event if the Board of
Directors were unable to convene in a timely manner. Likewise, the
Commission believes the proposed Systems Disconnect Rule, as described
in Section II.B.3 above, provides a rules-based process that will
enable DTC to identify potential cyber threats or other network
disruptions, which could help DTC prevent the spread of a participant's
systems disruptions to DTC, its participants, and other market
participants that could otherwise cause losses to DTC or its
participants.
One commenter suggests revising the definition of Major Event to be
consistent with the definition of Market Disruption Event in the Force
Majeure Rule.\55\ The commenter further argues the impact to DTC
covered by the definition of Major Event should be limited to ``DTCC
Systems'' (as defined in the proposed rule) to ensure the scope of the
proposed rule is limited to technical systems.\56\ The Commission
disagrees. As noted above, the purposes of both the Force Majeure Rule
and the Systems Disconnect Rule are different. The Force Majeure Rule
is designed to cover events external to DTC and its participants that
materially impact, or are likely to materially impact, DTC's ability to
provide its settlement services. The Systems Disconnect Rule, by
contrast, is designed to cover a participant's systems or network
disruption, which through its connection to DTC, is reasonably likely
to have a significant impact on DTC's systems. The differences between
the rules' purposes support the need for differing standards.\57\
Furthermore, the Commission notes the reference to ``including DTCC
Systems'' in the proposed definition of Major Event takes into account
how DTC's operations, i.e., its settlement services, work, in that they
utilize DTCC Systems. Consequently, the commenter's proposed revisions
are not necessary.\58\
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\55\ Specifically, the commenter suggests deleting reference to
``reasonably'' and by replacing ``significant'' with ``material''
when describing the likelihood and level of impact to DTC. See
letter from Anonymous, dated July 28, 2021, supra note 5.
\56\ See id.
\57\ The Commission also disagrees with the commenter's
suggestion to remove the references to ``reasonably'' with respect
to the likelihood of an event impacting DTC's operations. The
Commission believes that DTC's assessment of the likelihood of such
an impact should be reasonable before taking actions like
disconnecting a participant from its systems. In addition, the
Commission notes that DTC's references to ``reasonably likely'' and
``significant impact'' in the proposed definition of Major Event are
consistent with the Commission's definition of a ``Major SCI Event''
under Regulation SCI. 17 CFR 242.1000. Likewise, the Commission
notes that references in the proposed rule text to ``reasonable
basis'' and ``appropriate'' is consistent with the obligations
related to a Major SCI Event under Regulation SCI. 17 CFR 242.1002.
\58\ Another commenter expressed concern that the proposed
Systems Disconnect Rule could be used to benefit the trading
activity of certain participants at the detriment of disconnected
participants. See letter from Jarrod Knudson, dated June 27, 2021,
supra note 5. The Commission disagrees because the proposed rule, by
its terms, would only apply when certain Systems Disruptions occur
at a participant that could impact DTC's operations.
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Accordingly, the Commission finds that the implementation of the
Proposed Rule Change is consistent with Rule 17Ad-22(e)(17)(i) of the
Exchange Act.\59\
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\59\ 17 CFR 240.17Ad-22(e)(17)(i).
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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 \60\ and
the rules and regulations promulgated thereunder.
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\60\ 15 U.S.C. 78q-1.
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[[Page 57226]]
It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\61\ that Proposed Rule Change SR-DTC-2021-011, be, and hereby is,
approved.\62\
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\61\ 15 U.S.C. 78s(b)(2).
\62\ In approving the Proposed Rule Change, the Commission
considered the proposals' impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\63\
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\63\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-22439 Filed 10-13-21; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on October 14, 2021.
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