Notice2023-28706
Self-Regulatory Organizations; The Depository Trust Company; Notice of Filing of Proposed Rule Change To Modify the DTC Settlement Service Guide
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Published
December 28, 2023
Issuing agencies
Securities and Exchange Commission
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<title>Federal Register, Volume 88 Issue 248 (Thursday, December 28, 2023)</title>
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[Federal Register Volume 88, Number 248 (Thursday, December 28, 2023)]
[Notices]
[Pages 89752-89755]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-28706]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-99234; File No. SR-DTC-2023-013]
Self-Regulatory Organizations; The Depository Trust Company;
Notice of Filing of Proposed Rule Change To Modify the DTC Settlement
Service Guide
December 22, 2023.
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 December 20, 2023, 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. 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.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The proposed rule change \3\ consists of amendments to the DTC
Settlement Service Guide (``Settlement Guide'') \4\ to increase the
amount of the maximum Net Debit Cap for individual Participants,\5\ as
described below.
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\3\ Each capitalized term not otherwise defined herein has its
respective meaning as set forth the Rules, By-Laws and Organization
Certificate of DTC (the ``Rules''), available at <a href="http://www.dtcc.com/legal/rules-and-procedures.aspx">http://www.dtcc.com/legal/rules-and-procedures.aspx</a>.
\4\ Available at <a href="https://www.dtcc.com/-/media/Files/Downloads/legal/service-guides/Settlement.pdf">https://www.dtcc.com/-/media/Files/Downloads/legal/service-guides/Settlement.pdf</a>. The Settlement Guide is a
Procedure of DTC. 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, supra note 3. Procedures are binding on DTC and each
Participant in the same manner that they are bound by the Rules. See
Rule 27, supra note 3.
\5\ Pursuant to Rule 1, supra note 3, the term ``Net Debit Cap''
of a Participant means an amount determined by the Corporation in
the manner specified in the Procedures; provided, however, that the
maximum Net Debit Cap of the Participant shall be the least of (i) a
maximum amount applicable to all Participants based on the liquidity
resources of the Corporation, (ii) the Settling Bank Net Debit Cap
applicable to such Participant, or (iii) any other amount determined
by the Corporation, in its sole discretion.
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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 would modify the Settlement Guide to
increase the amount of the maximum Net Debit Cap for individual
Participants, as described below.
Background
Through its settlement services, DTC provides book-entry transfer
and pledge of interests in Eligible Securities and end-of-day net funds
settlement. DTC maintains a liquidity structure designed to facilitate
its maintenance of sufficient financial resources to complete
settlement each business day notwithstanding the failure to settle of a
defaulting Participant, or Affiliated Family of Participants,\6\ with
the largest settlement obligation. In this regard, the Collateral
Monitor \7\ and Net Debit Cap risk controls are employed by DTC to
provide that each Delivery Versus Payment \8\ is contingent on the
Participant that is the Receiver \9\ satisfying its end-of-day net
settlement obligation, if any.
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\6\ Pursuant to Rule 1, supra note 3, the term ``Affiliated
Family'' means each Participant that controls or is controlled by
another Participant and each Participant that is under the common
control of any Person. For purposes of this definition, ``control''
means the direct or indirect ownership of more than 50% of the
voting securities or other voting interests of any Person.
\7\ Pursuant to Rule 1, supra note 3, the term ``Collateral
Monitor'' of a Participant, as used with respect to its obligations
to the Corporation, means, on any Business Day, the record
maintained by the Corporation for the Participant which records, in
the manner specified in Procedures, the algebraic sum of (i) the Net
Credit or Debit Balance of the Participant and (ii) the aggregate
Collateral Value of the Collateral of the Participant.
\8\ Pursuant to Rule 1, supra note 3, the term ``Delivery Versus
Payment'' means a Delivery against a settlement debit to the Account
of the Receiver, as provided in Rule 9(A) and Rule 9(B) and as
specified in the Procedures.
\9\ Pursuant to Rule 1, supra note 3, the term ``Receiver'', as
used with respect to a Delivery of a Security, means the Person
which receives the Security.
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The Collateral Monitor prevents the completion of transactions that
would cause a Participant's Net Debit Balance to exceed the value of
Collateral in its account.\10\ In this regard, the settlement
obligation of each Participant must be fully collateralized, based on
the Collateral Monitor, which is DTC's process for measuring the
sufficiency of the Collateral in a Participant's account to cover the
Participant's net settlement obligation.\11\ This is designed so if a
Participant fails to pay for its settlement obligation, DTC will have
sufficient Collateral to obtain funding for settlement.
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\10\ Pursuant to Rule 1, supra note 3, the term ``Collateral''
of a Participant, as used with respect to its obligations to the
Corporation, means, on any Business Day, the sum of (i) the Actual
Participants Fund Deposit of the Participant, (ii) the Actual
Preferred Stock Investment of a Participant, (iii) all Net Additions
of the Participant and (iv) any settlement progress payments
(``SPP'') wired by the Participant to the account of the Corporation
at the Federal Reserve Bank of New York in the manner specified in
the Procedures. A SPP is Collateral that increases a Participant's
Collateral Monitor, but also reduces a Participant's Net Debit
Balance. See Settlement Guide, supra note 4, at 73. Instructions for
submission of a SPP are provided in the Settlement Guide. See
Settlement Guide, supra note 4, at 69. Pursuant to Rule 1, supra
note 3, the term ``Net Debit Balance'' of a Participant means the
amount by which the Gross Debit Balance of the Participant exceeds
its Gross Credit Balance. Id. The term ``Gross Credit Balance'' of a
Participant on any Business Day means the aggregate amount of money
the Corporation credits to all the Accounts in all the Account
Families of the Participant without accounting for any amount of
money the Corporation debits or charges thereto. Id. The term
``Gross Debit Balance'' of a Participant on any Business Day means
the aggregate amount of money the Corporation debits or charges to
all the Accounts in all the Account Families of the Participant
without accounting for any amount of money the Corporation credits
thereto. Id.
\11\ See Settlement Guide, supra note 4, at 5 and 72.
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The Net Debit Cap limits the Net Debit Balance that each
Participant can incur to an amount, based upon activity level, which
would be covered by DTC's liquidity resources. The Net Debit Cap is
structured so that DTC will have sufficient liquidity to complete
settlement should any single Participant or Participant family fail to
settle. The Net Debit Cap limits the Net Debit Balance of an individual
Participant at any point during DTC's processing day.\12\ The Aggregate
Affiliated Family Net Debit Cap \13\ limits the sum of Net
[[Page 89753]]
Debit Balances an Affiliated Family of Participants at any point during
the processing day [sic]. The Net Debit Cap of each Participant and the
Aggregate Affiliated Family Net Debit Cap of each Affiliated Family of
Participants are each set to an amount at or below DTC's liquidity
resources.\14\
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\12\ See Settlement Guide, supra note 4, at 6.
\13\ Pursuant to Rule 1, supra note 3, the term ``Aggregate
Affiliated Family Net Debit Cap'' means the sum of the Net Debit
Caps for the Participants that are part of an Affiliated Family in
the manner specified in the Procedures; provided, however, that the
maximum Aggregate Affiliated Family Net Debit Cap shall not exceed
the total available liquidity resources of the DTC.
\14\ To determine a Participant's Net Debit Cap, DTC records the
Participant's three highest intraday net debit peaks over a rolling
70-Business Day period. The Participant's average of these net debit
peaks is calculated and multiplied by a factor to determine the
Participant's Net Debit Cap, but not to exceed $1.80 BN. See
Settlement Guide, supra note 4, at 73. The maximum Net Debit Cap for
a Participant was increased to $1.80 BN from $1.5 BN in 2001, to
reduce processing blockages relating to increased trading volumes
and settlement values. This increase was facilitated by a coinciding
increase to DTC's liquidity resources. See Securities Exchange Act
Release No. 44509 (July 3, 2001), 66 FR 36350 (July 11, 2001) (File
No. SR-DTC-2001-09).
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DTC maintains two key liquidity resources that are considered
``qualifying liquid resources,'' as defined by Rule 17Ad-22(a)(14)
promulgated under the Act: \15\ specifically, (i) Required Participants
Fund Deposits across all Participants of $1.15 BN and (ii) a committed
line of credit facility (``LOC'') of $1.9 BN, to which DTC may pledge
Securities that are Collateral of the defaulting Participant in order
to complete settlement.
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\15\ 17 CFR 240.17Ad-22(e)(14).
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Taken together, the Participants Fund and line of credit provide
DTC with $3.05 BN in total liquidity resources.
Current Net Debit Cap Amounts
As noted above, the Net Debit Cap for an individual Participant is
$1.80 BN. DTC has established the maximum Aggregate Affiliated Family
Net Debit Cap at $2.85 BN, which is below DTC's total available
liquidity resources maintained by DTC to account for the possibility
that a defaulting Participant that is part of an Affiliated Family may
be a lender to the line of credit.
Together, the Net Debit Cap and Aggregate Affiliated Family Net
Debit Cap control the total settlement obligation that any Participant
or Affiliated Family, respectively, may incur. Any transaction that
would cause a Participant or an Affiliated Family to exceed its Net
Debit Cap or Aggregate Affiliated Family Net Debit Cap, as applicable,
will not be processed.\16\ Instead, the transaction will remain in a
pending status until the Net Debit Balance is reduced sufficiently to
allow processing.\17\ The Net Debit Balance may be reduced during the
processing day by, among other things, receipt of a Delivery Versus
Payment, which generates credits to the Participant's settlement
account, or by a SPP, which are funds that may be wired to DTC during
the processing day, in order to avoid a Participant having its receipts
of Securities blocked by its Net Debit Cap. To reduce transaction
blockage and the need to make SPPs, Participants have requested that
DTC raise the maximum Net Debit Cap.
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\16\ See Settlement Guide, supra note 4, at 73-74.
\17\ Id. at 62 and 73. Prior to processing, the transaction must
also satisfy the Collateral Monitor risk management control and be
approved by the Receiver via the Receiver Authorized Delivery
function. Id. at 70-72 and 59-60.
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Proposed Increase of the Net Debit Cap
DTC proposes to increase the maximum Net Debit Cap for an
individual Participant from $1.80 BN to $2.15 BN. (DTC is not proposing
to change the maximum Aggregate Affiliated Family Net Debit Cap of
$2.85 BN.) The proposed increase of $350 MM is supported by available
liquidity resources from the $450 MM Core Fund,\18\ to which all
Participants contribute, and the $1.90 BN LOC, which is collectively
$2.35 BN.\19\ Proposing to raise the maximum Net Debit Cap for an
individual Participant to $2.15 BN and not $2.35 BN allows for a $200
MM buffer to account for the possibility that a defaulted Participant
may also be a lender to the LOC.\20\
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\18\ The aggregate Participants Fund includes four component
amounts, as set forth below: the ``Core Fund,'' the ``Base Fund,''
the ``Incremental Fund'' and the ``Liquidity Fund.'' The Core Fund
is set by DTC at an aggregate amount of $450 MM and is comprised of
the Base Fund and the Incremental Fund. The Base Fund is the sum of
minimum deposits by all Participants, i.e., the amount that is
$7,500, times the number of Participants, at any time. The
Incremental Fund is the balance of the Core Fund up to $450 MM; this
is the amount that must be ratably allocated among Participants that
are required to pay more than a minimum deposit, as described in the
Settlement Guide. The Liquidity Fund component (set at $700 MM)
applies to Participants whose Affiliated Families have Net Debit
Caps that exceed $2.15 BN. See Settlement Guide, supra note 4, at
53-56.
\19\ The Liquidity Fund (set at $700 MM) is not included because
that amount only applies to Participants whose Affiliated Families
have Net Debit Caps that exceed $2.15 BN.
\20\ The $200 MM buffer is an amount greater than the
contribution of any lender to the DTC LOC.
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The proposed maximum Net Debit Cap increase better aligns the
maximum Net Debit Cap for an individual Participant with DTC's
available liquidity resources, as described above.
DTC expects that increasing the maximum Net Debit Cap would benefit
Participants generally. An impact study (``Impact Study'') conducted by
DTC for the period January 3, 2022, through December 30, 2022, showed
that a number of Participants that are currently capped at a $1.80 BN
Net Debit Cap would realize an immediate benefit from the proposed Net
Debit Cap increase. The liquidity needs across legal entities were
determined by looking at Participants reaching 90% of the current $1.80
BN maximum Net Debit Cap, identifying the transactions pending under
Net Debit Cap limits, and any incoming SPPs. By increasing the maximum
Net Debit Cap, the proposed rule change would help improve transaction
processing by enabling more transactions to process without the need
for a Receiving Participant to wait for Delivery Versus Payment credits
or submit SPPs to reduce its intraday Net Debit Balance. Moreover, any
Participant that is a Deliverer of a Delivery Versus Payment may see
less of its Deliveries pend because the Receiver may maintain a higher
Net Debit Cap. Meanwhile, as described above, the proposed Net Debit
Cap increase would continue to be supported by adequate DTC liquidity
resources available to complete system-wide settlement in the event of
a failure to settle by the largest Participant or Affiliated Family.
Proposed Rule Change
Pursuant to the proposed rule change, the Settlement Guide will be
revised to reflect the proposed increase to the Net Debit Cap.
Specifically, two references to the existing $1.80 BN Net Debit Cap
will be revised to reflect the proposed $2.15 BN Net Debit Cap.
Effective Date
DTC would implement the proposed changes no later than 60 Business
Days after the approval of the proposed rule change by the Commission.
2. Statutory Basis
Section 17A(b)(3)(F) \21\ of the Act 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 the proposed rule change is consistent with the section
17A(b)(3)(F) of the Act.
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\21\ 15 U.S.C. 78q-1(b)(3)(F).
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The Impact Study results indicate that by increasing the maximum
Net Debit Cap, as described above, the proposed rule change would help
improve transaction processing by enabling more transactions to process
without the need for a Receiving Participant to wait for Delivery
Versus Payment-related credits or submit SPPs to reduce its intraday
Net Debit Balance. Moreover, any Participant that is a Deliverer of a
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Delivery Versus Payment may see less of its deliveries pend because the
Receiver may maintain a higher Net Debit Cap. Meanwhile, the proposed
Net Debit Cap increase would continue to be supported by adequate DTC
liquidity resources available to complete system-wide settlement in the
event of a failure to settle by the largest Participant or Affiliated
Family. Therefore, DTC believes the proposed rule change is consistent
with section 17A(b)(3)(F) of the Act, cited above, by helping to
promote the prompt and accurate clearance and settlement of securities
transactions.
Rule 17Ad-22(e)(7)(i) \22\ promulgated under the Act requires,
inter alia, that DTC, a covered clearing agency, establish, implement,
maintain and enforce written policies and procedures reasonably
designed to, as applicable, effectively measure, monitor, and manage
the liquidity risk that arises in or is borne by the covered clearing
agency, including measuring, monitoring, and managing its settlement
and funding flows on an ongoing and timely basis, and its use of
intraday liquidity by, at a minimum maintaining sufficient liquid
resources to effect same-day settlement of payment obligations with a
high degree of confidence under a wide range of foreseeable stress
scenarios that includes, but is not limited to, the default of the
participant family that would generate the largest aggregate payment
obligation for the covered clearing agency in extreme but plausible
market conditions (i.e., the ``Cover One standard'').
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\22\ 17 CFR 240.17Ad-22(e)(7)(i).
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DTC's liquidity needs for settlement are driven by protecting DTC
against the possibility that a Participant may fail to pay its
settlement obligations on a Business Day. The tools available to DTC
under its Rules, including the Net Debit Cap, allow it to regularly
test the sufficiency of liquid resources on an intraday and end-of-day
basis and adjust to stressed circumstances during a settlement day to
protect itself and Participants against liquidity exposure under normal
and stressed market conditions. DTC calculates its liquidity needs per
Participant (at a legal entity level) and further aggregates these
amounts at a family level (that is, including all affiliated
Participants, based on the assumption that all such affiliates may fail
simultaneously). In this regard, DTC monitors settlement flows and net-
debit obligations daily, and its current available liquidity resources
are sufficient to satisfy the Cover One standard.
As described above, the proposed rule change would only increase
the maximum Net Debit Cap for individual Participants from $1.80 BN to
$2.15 BN, which is below DTC's available liquidity when considering the
Core Fund and LOC collectively, and it would not otherwise alter the
way DTC monitors settlement flows and net-debit obligations. Therefore,
DTC believes the proposal is consistent with Rule 17Ad-22(e)(7)(i),
cited above, because the proposed increase would remain aligned with
DTC's continued maintenance of sufficient liquid resources to satisfy
its Cover One standard and not change DTC's monitoring of settlement
flows and net-debit obligations.
(B) Clearing Agency's Statement on Burden on Competition
DTC does not believe that the proposed rule change would impose a
burden on competition.\23\ The proposed rule change would increase the
maximum Net Debit Cap from $1.80 BN to $2.15 BN, and would apply to
each Participant equally to the extent a Participant's Net Debit
Balance, barring the effect of the Net Debit Cap control, could exceed
the existing $1.80 BN.
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\23\ 15 U.S.C. 78q-1(b)(3)(I).
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DTC believes the proposed rule change may promote competition
because it alleviates the need for some Participants to wait for
Delivery Versus Payment credits or submit SPPs for their transactions
to process.
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants, or Others
DTC has not received or solicited any written comments relating to
this proposal. If any written comments are received, they would be
publicly filed as an Exhibit 2 to this filing, as required by Form 19b-
4 and the General Instructions thereto.
Persons submitting comments are cautioned that, according to
Section IV (Solicitation of Comments) of the Exhibit 1A in the General
Instructions to Form 19b-4, the Commission does not edit personal
identifying information from comment submissions. Commenters should
submit only information that they wish to make available publicly,
including their name, email address, and any other identifying
information.
All prospective commenters should follow the Commission's
instructions on how to submit comments, available at <a href="https://www.sec.gov/regulatory-actions/how-to-submitcomments">https://www.sec.gov/regulatory-actions/how-to-submitcomments</a>. General questions
regarding the rule filing process or logistical questions regarding
this filing should be directed to the Main Office of the Commission's
Division of Trading and Markets at <a href="/cdn-cgi/l/email-protection#14606675707d7a73757a707975667f716067546771773a737b62"><span class="__cf_email__" data-cfemail="6d191f0c0904030a0c0309000c1f0608191e2d1e080e430a021b">[email protected]</span></a> or 202-
551-5777.
DTC reserves the right to not respond to any comments received.
III. Date of Effectiveness of the Proposed Rule Change, and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
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="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#c7b5b2aba2eaa4a8aaaaa2a9b3b487b4a2a4e9a0a8b1"><span class="__cf_email__" data-cfemail="e092958c85cd838f8d8d858e9493a0938583ce878f96">[email protected]</span></a>. Please include
file number SR-DTC-2023-013 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-2023-013. 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="https://www.sec.gov/rules/sro.shtml">https://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
[[Page 89755]]
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 a.m. and 3 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">dtcc.com/legal/sec-rule-filings</a>). Do not include personal identifiable information in
submissions; you should submit only information that you wish to make
available publicly. We may redact in part or withhold entirely from
publication submitted material that is obscene or subject to copyright
protection. All submissions should refer to File Number SR-DTC-2023-013
and should be submitted on or before January 18, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\24\
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\24\ 17 CFR 200.30-3(a)(12).
Christina Z. Milnor,
Assistant Secretary.
[FR Doc. 2023-28706 Filed 12-27-23; 8:45 am]
BILLING CODE 8011-01-P
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