Notice2022-12011
Self-Regulatory Organizations; The Depository Trust Company; Order Approving the Proposed Rule Change To Provide Settlement Services for Transactions Entered Into Under the Proposed Securities Financing Transaction Clearing Service of the National Securities Clearing Corporation
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 6, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 108 (Monday, June 6, 2022)</title>
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[Federal Register Volume 87, Number 108 (Monday, June 6, 2022)]
[Notices]
[Pages 34325-34328]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-12011]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-95012; File No. SR-DTC-2022-002]
Self-Regulatory Organizations; The Depository Trust Company;
Order Approving the Proposed Rule Change To Provide Settlement Services
for Transactions Entered Into Under the Proposed Securities Financing
Transaction Clearing Service of the National Securities Clearing
Corporation
May 31, 2022.
I. Introduction
On March 28, 2022, The Depository Trust Company (``DTC'') filed
with the Securities and Exchange Commission (``Commission'') proposed
rule change SR-DTC-2022-002 (``Proposed Rule Change'') pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\
and Rule 19b-4 thereunder.\2\ The Proposed Rule Change was published
for comment in the Federal Register on April 18, 2022.\3\ For the
reasons discussed below, the Commission is approving the Proposed Rule
Change.\4\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 94692 (April 12, 2022),
87 FR 22971 (April 18, 2022) (SR-DTC-2022-002) (``Notice of
Filing'').
\4\ Each capitalized term not otherwise defined herein has its
respective meaning as set forth in DTC's rules, including, but not
limited to, the Rules, By-Laws and Organization Certificate of DTC
(``Rules''), the DTC Settlement Service Guide (``Settlement
Guide''), and the Guide to the 2020 DTC Fee Schedule (``Fee
Guide''), available at <a href="http://www.dtcc.com/legal/rules-and-procedures.aspx">http://www.dtcc.com/legal/rules-and-procedures.aspx</a>.
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II. Description of the Proposed Rule Change
A. Background
DTC serves as a central securities depository providing, in part,
custodial services for equity securities, which include the
safekeeping, record keeping, book-entry transfer, and pledge of
securities among its Participants.\5\ The National Securities Clearing
Corporation (``NSCC'') provides clearing and settlement services for
trades, including equity securities.\6\ NSCC relies on an
[[Page 34326]]
interface with DTC for the book-entry movement of securities to settle
transactions.\7\
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\5\ See The Depository Trust Company, Disclosure Framework for
Covered Clearing Agencies and Financial Market Infrastructures at 7,
9-10 (December 2021) available at <a href="https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/DTC_Disclosure_Framework.pdf">https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/DTC_Disclosure_Framework.pdf</a>.
\6\ See National Securities Clearing Corporation, Disclosure
Framework for Covered Clearing Agencies and Financial Market
Infrastructures at 7-10 (December 2021), available at <a href="https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/NSCC_Disclosure_Framework.pdf">https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/NSCC_Disclosure_Framework.pdf</a>.
\7\ Id. at 10.
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NSCC has proposed to introduce a new central clearing for
securities financing transactions (``SFTs'').\8\ In general, SFTs
involve transactions where the parties exchange equity securities
against cash and simultaneously agree to exchange the same securities
and cash, plus or minus a daily interest (referred to as a rate
payment), on a future date. Through its central clearing service, NSCC
would novate SFT transactions entered into by its Members. The proposed
SFTs between counterparties that are Members of NSCC would be settled
through their respective Participant accounts at DTC.
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\8\ Securities Exchange Act Release No. 94694 (April 12, 2022),
87 FR 23372 (April 19, 2022) (SR-NSCC-2022-003). NSCC also filed the
proposal contained in the Proposed Rule Change as advance notice SR-
NSCC-2022-801 with the Commission pursuant to Section 806(e)(1) of
the Dodd-Frank Wall Street Reform and Consumer Protection Act
entitled the Payment, Clearing, and Settlement Supervision Act of
2010. 12 U.S.C. 5465(e)(1); 17 CFR 240.19b-4(n)(1)(i). Securities
Exchange Act Release No. 94695 (April 12, 2022), 87 FR 23328 (April
19, 2022) (SR-NSCC-2022-801).
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In order to settle SFTs arising from NSCC's proposed service, DTC
proposes to amend the Rules, the Settlement Guide, and the Fee Guide to
(i) establish new definitions, instructions, and accounts, (ii) apply a
modified look-ahead process to the new account that NSCC would maintain
at DTC, (iii) establish a fee for a new transaction, and (iv) make
conforming and technical changes.
B. New Definitions, Instructions, and Accounts for the SFT Service
DTC proposes to revise its Rules, Settlement Guide, and Fee Guide
to add new definitions, instructions, and accounts to provide for the
settlement of SFTs. Specifically, for SFT purposes, NSCC would act as
the special representative for DTC Participants who are also NSCC
Members and would have the authority to instruct DTC, on behalf of the
Participant, to make a transfer of securities from the Participant's
DTC account to an account that NSCC maintains at DTC.\9\
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\9\ The proposal would also establish a new special
representative SFT account to be used in connection with SFT
service.
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The proposal would revise the Settlement Guide to include a new
section describing settlement of SFTs. To effectuate a DVP transaction
between Participants, NSCC would send DTC a pair of DVP instructions:
(i) one instruction, as the Special Representative of the securities
lending Participant, to deliver the subject securities versus payment
from the delivering Participant to the NSCC SFT Account, and (ii) one
instruction, on NSCC's own behalf, to deliver the subject securities
versus payment from the NSCC SFT Account to the Account of the
securities borrowing Participant.\10\ Effectively, pursuant to the
DVPs, the subject securities would move from the security lending
Participant to NSCC, and then from NSCC to the security borrowing
Participant.
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\10\ Under the proposal, it is possible that the securities
lending Participant could submit its own DVP instruction to deliver
the subject securities to the NSCC SFT account. NSCC would then have
to make the corresponding instruction to deliver the securities to
the securities borrowing participant, or the trade would be
rejected.
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When an SFT completes, NSCC would again submit a pair of DVP
instructions: (i) one instruction as the special representative of the
security borrowing Participant to deliver the subject securities to the
special representative SFT account, and (ii) one instruction on NSCC's
own behalf to deliver the subject securities from the special
representative SFT. If the pair of instructions satisfy DTC risk
management controls and the modified look-ahead process,\11\ DTC would
process the deliveries.
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\11\ See Section II.C and text accompanying note 13 infra.
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The proposal would also provide that DTC would process SFT price
differential payment orders, which are payment orders for the crediting
and debiting of payment amounts between Participants relating to SFT
activity at NSCC. Specifically, NSCC would be able to submit a SFT
price differential payment order (i) as the special representative of
the payee Participant to credit the amount to the payee Participant
account, and (ii) as the special representative of the payor
Participant to debit the amount to the payor Participant account. The
two instructions would effectively cause DTC to transfer the payment
orders from one Participant to NSCC, and from NSCC to another
Participant. If the pair of instructions satisfy DTC risk management
controls and the modified look-ahead, DTC would process the
payments.\12\
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\12\ See Section II.C and text accompanying note 13 infra.
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C. Modified Look-Ahead Processing
DTC uses certain risk management controls, the Collateral Monitor
and Net Debit Cap, to manage its credit risk. These two controls work
together to protect the DTC settlement system in the event of a
Participant default. The Collateral Monitor requires net debit
settlement obligations, as they accrue intraday, to be fully
collateralized; the Net Debit Cap limits the amount of any
Participant's net debit settlement obligation to an amount that can be
satisfied with DTC liquidity resources.\13\ DTC uses a look-ahead
processing to reduce transaction blockage by applying the net amount of
offsetting receive and deliver transactions in the same security rather
than the gross amount of the receive transaction to a Participant's Net
Debit Cap. The look-ahead process calculates and processes submitted
transactions in the same CUSIP that, when processed simultaneously,
would not violate the risk management controls of the involved
Participants.\14\
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\13\ See Settlement Guide, supra note 4, at 64-67.
\14\ Specifically, the look-ahead process identifies a receive
transaction pending due to a net debit cap insufficiency and
determines whether an offsetting delivery transaction pending
because of a quantity deficiency in the same security would permit
both transactions to be completed in compliance with DTC risk
management controls. See Settlement Guide, supra note 4, at 45.
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The special representative SFT account is designed to be a pass-
through account for SFTs between Participants that are NSCC SFT
counterparties, and accordingly, NSCC's obligations to DTC with respect
to all SFTs to which the special representative SFT account was a party
should be netted to zero.\15\ DTC states that in an effort to help
ensure that there would not be any net settlement obligation against
the special representative SFT account, and to prevent transaction
blockage due to risk management controls on the special representative
SFT account, DTC proposes to use a modified look-ahead process for the
instructions it receives from NSCC in connection with the Special
Representative SFT Account.\16\
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\15\ See Notice of Filing, supra note 3, at 22973.
\16\ See id.
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Pursuant to the proposal, upon receipt of SFT-related instructions
from NSCC, DTC would only complete a transaction when (i) the pair of
instructions from NSCC are consistent in terms of the number of subject
shares and/or dollar amount, CUSIP, and DTCC Reference ID,\17\ and (ii)
the net effect of processing the instructions would not violate the
respective Net Debit Caps, Collateral Monitor or other risk management
system controls of the Participants that are on each side of the SFTs.
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\17\ The DTCC Reference ID is the fourteen-digit UTC Loan ID
that NSCC assigns to each SFT transaction.
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In addition, because the modified look-ahead relies on the
completion of
[[Page 34327]]
offsetting transactions for a particular SFT and not a net amount like
regular look-ahead processing, transactions to and from the NSCC SFT
Account would not be subject to either reclaims or Receiver Authorized
Delivery (``RAD'').\18\ DTC represents that because both reclaims and
RAD effectively permit one side of the transaction to reject or reverse
the transaction, allowing such activity would interfere with the
ability of the modified look-ahead to rely on the completion of the
offsetting transactions.\19\
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\18\ A reclaim is the return of various orders and transactions
received by a Participant. RAD is a control mechanism that allows a
Participant to review transactions prior to completion of
processing. See Settlement Guide, supra note 4, at 6.
\19\ See Notice of Filing, supra note 3, at 22973.
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D. SFT Price Differential Fee
DTC proposes to amend the Fee Guide to establish a fee for SFT
price differential payment orders.\20\ DTC proposes a fee of $0.005 for
an SFT price differential payment order, which would be charged to
payors and payees per item delivered or received.
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\20\ The proposal establishes a fee for SFT Price Differential
payment orders because DTC does not currently process such payment
orders. DTC would apply other currently existing fees that are
relevant to SFTs pursuant to its Fee Guide. For example, for a DVP
transaction in connection with an SFT, DTC would charge a stock loan
and return fee of $0.18 to payors and payees per item delivered and
received.
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According to DTC, the fee is lower than the $0.10 fee charged for
an order for delivery or receipt in connection with uncleared stock
loan transactions.\21\ DTC states that the reason for a lower fee is
because NSCC's SFT service would require a higher volume of payment
orders compared to stock loan transactions processed bilaterally.\22\
DTC believes that NSCC's SFT service would require a higher volume of
payment orders because SFT Counterparties would pay and collect price
differentials at the individual transaction level, while in a bilateral
transaction, the counterparties would typically pay and collect at the
CUSIP level, inclusive of all open stock loan transactions of a given
counterparty.\23\
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\21\ See Notice of Filing, supra note 3, at 22973.
\22\ Id.
\23\ See Notice of Filing, supra note 3, at 22973.
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E. Conforming and Technical Changes
DTC proposes to make conforming changes to reflect the SFT
activities, correct technical errors, add headings, and replace
undefined terms with defined terms in order to ensure consistency and
clarity of the Rules and the Settlement Guide.
III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act \24\ directs the Commission to
approve a proposed rule change of a self-regulatory organization if it
finds that such proposed rule change is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to such organization. After careful consideration, the
Commission finds that the Proposed Rule Change is consistent with the
requirements of the Act and the rules and regulations applicable to
DTC. In particular, the Commission finds that the Proposed Rule Change
is consistent with Section 17A(b)(3)(F) and 17A(b)(3)(D) of the Act
\25\ and Rules 17Ad-22(e)(21) \26\ thereunder.
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\24\ 15 U.S.C. 78s(b)(2)(C).
\25\ 15 U.S.C. 78q-1(b)(3)(F) and (3)(D).
\26\ 17 CFR 240.17Ad-22(e)(21).
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A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act \27\ requires, in part, that the
rules of a clearing agency, such as DTC, be designed to promote the
prompt and accurate clearance and settlement of securities transactions
and to foster cooperation and coordination with persons engaged in the
clearance and settlement of securities transactions.
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\27\ 15 U.S.C. 78q-1(b)(3)(F).
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As described above in Section II.A., DTC proposes to revise its
Rules, Settlement Guide, and Fee Guide to be able to provide
Participants with settlement services for SFTs cleared through the
proposed NSCC service. As stated in Section II.B., the proposal would
provide new definitions, instructions, and accounts to effectuate SFTs,
and provide a basis for DTC to accept and rely on NSCC's instructions
in connections with the proposed SFT service. Specifically, DTC would
amend its Rules to provide for the additional authority of NSCC, as the
special representative of a Participant, to submit DVP instructions and
SFT price differential payment orders to DTC, on behalf of
Participants. By providing NSCC with the authority to submit these
instructions on behalf of the Participants, the Proposed Rule Change
supports the efficient settlement of cleared SFTs, thereby promoting
the prompt and accurate clearance and settlement of securities
transactions.
Furthermore, as described in Section II.C., the Proposed Rule
Change would apply a modified look-ahead process to the new special
representative SFT account in order to (i) ensure that there would not
be any net settlement obligation against the special representative SFT
account, and (ii) prevent transaction blockage that could occur from
unsatisfied risk management controls on the special representative SFT
account. By applying a modified look-ahead, the Commission believes
that the proposal is designed to promote efficient processing of SFTs,
thereby promoting the prompt and accurate clearance and settlement of
securities transactions.
Lastly, as described in Section II.E., DTC proposes to make
conforming and technical changes. The Commission believes that the
changes would help ensure that the Rules and the Settlement Guide
remain consistent, clear, and accurate. Having consistent, clear, and
accurate Rules and Settlement Guide would help Participants to better
understand their rights and obligations regarding DTC settlement
services in connection with the NSCC SFT service. The Commission
believes that better enabling Participants to understand and thus
comply with the Rules and the Settlement Guide would promote the prompt
and accurate clearance and settlement of securities transactions.
The Commission further believes that the Proposed Rule Change is
reasonably designed to foster cooperation and coordination with persons
engaged in the clearance and settlement of securities transactions. As
described above in Section II.A., DTC proposes to amend its Rules,
Settlement Guide, and Fee Guide to be able to process SFTs arising from
NSCC's proposed SFT service. Although NSCC provides clearing and
settlement services for transactions, it relies on an interface with
DTC for the book-entry movement of securities to settle transactions.
Without DTC's actions, NSCC would not be able to settle SFTs at DTC.
Accordingly, the Commission believes that establishing new definitions,
instructions, and accounts to effectuate SFTs, modifying look-ahead
processing, and making conforming and technical changes would foster
cooperation and coordination between NSCC and DTC.
For the reasons stated above, the Commission believes that the
Proposed Rule Change is reasonably designed to promote the prompt and
accurate clearance and settlement of securities transactions, and
foster cooperation and coordination with persons engaged in the
clearance and settlement of securities transactions. The Commission
believes, therefore, that the Proposed Rule Change is consistent with
Section 17A(b)(3)(F) of the Act.\28\
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\28\ Id.
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B. Consistency With Section 17A(b)(3)(D) of the Act
Section 17A(b)(3)(D) of the Act requires that the rules of a
clearing agency provide for the equitable allocation of reasonable
dues, fees, and other charges among its participants.\29\
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\29\ 15 U.S.C. 78q-1(b)(3)(D).
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As described above in Section II.D., DTC would establish a fee of
$0.005 per item delivered or received, which would be charged to the
payor and the payee of an SFT price differential payment order. The
Commission believes that the proposed fee for SFT price differential
payment orders would provide for the equitable allocation of reasonable
dues, fees, and other charges among Participants. First, the proposed
fee of $0.005 is less than the $0.10 fee for payment order applicable
for uncleared bilateral stock loan transactions.\30\ Second, the
Commission understands that due to the lack of history for cleared SFT
activity,\31\ DTC cannot estimate at this time the average number of
SFT Price Differential payment orders that would be processed and
cannot, therefore, quantify a precise fee.\32\ Accordingly, the
Commission believes that the proposed fee, which is designed to take
into account the imbalance between the amount of payment orders that
would be required for cleared SFTs and the amount required for
uncleared bilateral stock loan transactions, is reasonable. The
Commission also believes that the proposed fee would be equitably
allocated because the fee would be charged to payors and payees per
item delivered or received in accordance with their use of SFT price
differential payment orders and all such payors and payees would be
treated equally with respect to the fee.
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\30\ See Notice of Filing, supra note 3, at 22973.
\31\ NSCC would be offering central clearing for overnight SFTs
for the first time, and accordingly, NSCC would not be able to
anticipate the size and composition of the SFT activities. See
Securities Exchange Act Release No. 94694 (April 12, 2022), 87 FR
23372, 22375 (April 19, 2022) (SR-NSCC-2022-003).
\32\ See Notice of Filing, supra note 3, at 22973.
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Therefore, the Commission believes that the Proposed Rule Change
establishing a fee for the delivery and receipt of an SFT price
differential payment order is designed to provide for the equitable
allocation of reasonable dues, fees, and other charges among
participants, consistent with Section 17A(b)(3)(D) of the Act.\33\
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\33\ 15 U.S.C. 78q-1(b)(3)(D).
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C. Consistency With Rule 17Ad-22(e)(21)
Rule 17Ad-22(e)(21) promulgated under the Act requires, in part, a
covered clearing agency establish, implement, maintain and enforce
written policies and procedures reasonably designed to be efficient and
effective in meeting the requirements of its participants and the
markets it serves, including the clearing agency's clearing and
settlement arrangements and the scope of products cleared or
settled.\34\
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\34\ 17 CFR 240.17Ad-22(e)(21).
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As described above in Section II.A., DTC proposes to revise its
Rules, Settlement Guide, and Fee Guide to be able to process SFTs
arising from NSCC's proposed SFT service. By doing so, DTC would assist
NSCC to efficiently and effectively execute its new service, which is
to clear and settle a new product. Also, as stated in Section II.B.,
the proposal would (i) provide a basis for DTC to accept and rely on
the instructions from NSCC as special representative of DTC's
Participants for SFTs, and (ii) establish a new type of instructions
for SFT price differential payment orders. As stated in Section II.C.,
the proposal would revise the look-ahead processing to accommodate SFTs
and ensure that SFTs would be processed timely and efficiently. As
stated in Section II.D., the proposal would also revise DTC's fee guide
to clearly establish a fee for SFT price differential payment orders,
which are new transactions for DTC. Without such changes, NSCC would
not be able to clear and settle SFTs at DTC.
For the reasons stated above, the Commission believes that the
Proposed Rule Change is reasonably designed to be efficient and
effective in meeting the requirements of its participants and the
market it serves, and consistent with Rule 17Ad-22(e)(21).\35\
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\35\ Id.
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IV. Conclusion
On the basis of the foregoing, the Commission finds that the
Proposed Rule Change is consistent with the requirements of the Act and
in particular with the requirements of Section 17A of the Act \36\ and
the rules and regulations promulgated thereunder.
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\36\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\37\ that Proposed Rule Change SR-DTC-2022-002, be, and hereby is,
approved.\38\
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\37\ 15 U.S.C. 78s(b)(2).
\38\ In approving the Proposed Rule Change, the Commission
considered the proposals' impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\39\
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\39\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-12011 Filed 6-3-22; 8:45 am]
BILLING CODE 8011-01-P
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