Notice2024-02420
Self-Regulatory Organizations; The Depository Trust Company; Order Approving of Proposed Rule Change To Modify the DTC Settlement Service Guide
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Published
February 7, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 26 (Wednesday, February 7, 2024)</title>
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[Federal Register Volume 89, Number 26 (Wednesday, February 7, 2024)]
[Notices]
[Pages 8466-8469]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-02420]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-99456; File No. SR-DTC-2023-013]
Self-Regulatory Organizations; The Depository Trust Company;
Order Approving of Proposed Rule Change To Modify the DTC Settlement
Service Guide
February 1, 2024.
I. Introduction
On December 20, 2023, The Depository Trust Company (``DTC'') filed
with the Securities and Exchange Commission (``Commission'') proposed
rule change SR-DTC-2023-013 (``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 December 28, 2023.\3\ The
Commission has received no comments on the Proposed Rule Change. 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\ See Securities Exchange Act Release No. 99234 (Dec. 22,
2023), 88 FR 89752 (Dec. 28, 2023) (File No. SR-DTC-2023-013)
(``Notice of Filing'').
\4\ Capitalized terms not defined herein are defined in the
Rules, By-Laws and Organization Certificate of DTC (``Rules'') and
the DTC Settlement Service Guide (``Settlement Guide''), available
at <a href="https://www.dtcc.com/legal/rules-and-procedures.aspx">https://www.dtcc.com/legal/rules-and-procedures.aspx</a>.
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[[Page 8467]]
II. Background
DTC serves as a central securities depository providing, in part,
custodial services for equity securities, which include the
safekeeping, record keeping, book-entry transfer, and pledge of
securities among its Participants.\5\ DTC uses certain risk management
controls, including its Collateral Monitor and Net Debit Cap, to
protect the DTC settlement system in the event of a Participant default
by ensuring that at any time the settlement obligation of any
Participant will be fully collateralized and the amount due in
settlement cannot exceed DTC liquidity resources.\6\
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\5\ See The Depository Trust Company, Disclosure Framework for
Covered Clearing Agencies and Financial Market Infrastructures (Mar.
2023) (``Disclosure Framework''), available at <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 id.
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The Collateral Monitor \7\ tracks whether each Participant has
available sufficient collateral value to secure funding for a
Participant's net settlement obligation, in the event of the
Participant's default.\8\ As such, the Collateral Monitor requires net
debit settlement obligations to be fully collateralized as they accrue
intraday, preventing the completion of transactions that would cause a
Participant's Net Debit Balance \9\ to exceed the value of the
Collateral in the Participant's account.\10\ DTC states that this
ensures it will have sufficient Collateral to obtain funding for
settlement if a Participant fails to pay for its settlement
obligations.\11\ The Collateral Monitor tracks the value of Collateral
supporting the settlement obligation of each Participant, where the
collateral value of a security is the market price less the haircut
amount determined by DTC.\12\ Throughout the day, debits and credits to
the Participant's securities and settlement accounts result in
corresponding changes in its Collateral Monitor.\13\ When processing a
transaction, DTC verifies that the deliverers and receiver's Collateral
Monitor will not become negative when the transaction is processed, and
when under-collateralized, the transaction will remain in a pending
status until the deficient account has sufficient collateral to allow
for processing.\14\
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\7\ The ``Collateral Monitor'' of a Participant refers to 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. See Rule 1 (definition of
``Collateral Monitor''), supra note 4.
\8\ See Disclosure Framework, supra note 5, at 54.
\9\ The ``Net Debit Balance'' of a Participant is the amount by
which the Gross Debit Balance of the Participant exceeds its Gross
Credit Balance. See Rule 1 (definition of ``Net Debit Balance''),
supra note 4. The ``Gross Debit Balance'' of a Participant refers to
the aggregate amount of money DTC debits or charges to all the
Accounts in all the Account Families of the Participant without
accounting for any amount of money credited thereto. Id. (definition
of ``Gross Debit Balance''). The ``Gross Credit Balance'' of a
Participant refers to the aggregate amount of money DTC credits to
all the Accounts in all the Account Families of the Participant
without accounting for any amount of money debited or charged
thereto. Id. (definition of ``Gross Credit Balance'').
\10\ The ``Collateral'' of a Participant refers to 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 SPP wired by the
Participant to the Corporation. See id. (definition of
``Collateral''); infra note 18.
\11\ See Notice of Filing, supra note 3, at 89752.
\12\ See Disclosure Framework, supra note 5, at 53.
\13\ See id. at 54.
\14\ See id.
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The Net Debit Cap limits the Net Debit Balance that a Participant
can incur, thus limiting any Participant's net debit settlement
obligation to an amount that can be covered by DTC's liquidity
resources at any point during DTC's processing day.\15\ Likewise, the
Aggregate Affiliated Family Net Debit Cap limits the sum of Net Debit
Balances of an Affiliated Family of Participants, provided that the
maximum Aggregate Affiliated Family Net Debit Cap not exceed the total
available liquidity resources of DTC.\16\ When a transaction would
cause a Participant's Net Debit Balance to exceed its Net Debit Cap, it
is not processed.\17\ Instead, the transaction remains in a pending
status until the Participant's Net Debit Balance is sufficiently
reduced to allow processing. 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 Settlement Progress Payment (``SPP''), which are funds
that may be wired to DTC \18\ for the Participant to prevent its Net
Debit Cap from blocking its receipt of securities.
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\15\ See Settlement Guide, supra note 4, at 6; definition of Net
Debit Balance, supra note 9.
\16\ ``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, control meaning the direct
or indirect ownership of more than 50% of the voting securities or
other voting interests of any Person. See Rule 1 (definition of
``Affiliated Family''), supra note 4. The ``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. Id. (definition of ``Aggregate
Affiliated Family Net Debit Cap'').
\17\ See Settlement Guide, supra note 4, at 62, 73-74.
\18\ A SPP is Collateral that increases a Participant's
Collateral Monitor, but also reduces a Participant's Net Debit
Balance. See id. at 73.
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According to DTC, its liquidity structure is designed to maintain
sufficient financial resources to complete settlement each business
day, even in the event of the failure to settle of a Participant, or
Affiliated Family of Participants, with the largest settlement
obligation.\19\ DTC calculates its liquidity needs per Participant at a
legal entity level, and further aggregates these amounts for an
Affiliated Family based on the assumption that all such affiliates may
fail simultaneously.\20\ DTC states that its two key liquidity
resources are: \(i)\ Required Participants Fund Deposits across all
Participants of $1.15 billion, and (ii) a committed line of credit
facility (``LOC'') of $1.9 billion, to which DTC may pledge Securities
that are Collateral of the defaulting Participant in order to complete
settlement.\21\ Together, the Participants Fund and LOC provide DTC
with $3.05 billion in total liquidity resources.
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\19\ See Notice of Filing, supra note 3, at 89752.
\20\ Id. at 89754.
\21\ See Settlement Guide, supra note 4, at 74.
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As noted above, DTC sets both the maximum Net Debit Cap and the
Aggregate Affiliated Family Net Debit Cap to an amount at or below
DTC's liquidity resources.\22\ Currently, the Net Debit Cap for an
individual Participant is $1.80 billion. The current Aggregate
Affiliated Family Net Debit Cap is $2.85 billion, which DTC states is
below DTC's total available liquidity resources to account for the
possibility that a defaulting Participant that is part of an Affiliated
Family may be a lender to the LOC.\23\
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\22\ 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 billion. See
id. at 73. DTC increased the maximum Net Debit Cap for a Participant
to $1.80 billion from $1.5 billion in 2001, to reduce processing
blockages relating to increased trading volumes and settlement
values, with this increase 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).
\23\ See Notice of Filing, supra note 3, at 89753.
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III. Description of the Proposed Rule Change
DTC proposes increasing the maximum Net Debit Cap from $1.8 billion
to $2.15 billion. DTC states that Participants have requested that DTC
raise the maximum Net Debit Cap to reduce transaction blockage and the
need to make SPPs when reducing the Net Debit Balance during the
processing day, allowing for less transactions in a
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pending status because Participants may maintain a higher Net Debit
Balance.\24\ Specifically, DTC proposes revising two references to the
existing $1.80 billion Net Debit Cap for an individual Participant in
the Settlement Guide to reflect the proposed $2.15 billion Net Debit
Cap. DTC is not proposing a change to the current maximum Aggregate
Affiliated Family Net Debit Cap of $2.85 billion.
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\24\ See id.
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DTC states that the proposed increase better aligns the maximum Net
Debit Cap for an individual Participant with DTC's available liquidity
resources.\25\ According to DTC, the proposed increase of $350 million
to the Net Debit Cap is supported by qualifying liquid resources from
the $450 million Core Fund to which all Participants contribute,\26\
and the $1.90 billion LOC, collectively providing $2.35 billion in
liquidity resources.\27\ DTC states that this $200 million buffer
between the $2.35 billion in liquidity resources and the proposed $2.15
billion Net Debit Cap accounts for the possibility that a defaulted
Participant may also be a lender to the LOC.\28\
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\25\ See id.
\26\ The aggregate Participants Fund includes four component
amounts: the ``Core Fund,'' the ``Base Fund,'' the ``Incremental
Fund,'' and the ``Liquidity Fund.'' The Core Fund, set by DTC at an
aggregate amount of $450 million, is comprised of the Base Fund and
the Incremental Fund. The Base Fund is the sum of minimum deposits
by all Participants and equals 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 million; 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 million) applies to
Participants whose Affiliated Families have Net Debit Caps that
exceed $2.15 billion. See Settlement Guide, supra note 4, at 53-56.
\27\ See Notice of Filing, supra note 3, at 89752. DTC states
that the Liquidity Fund is not included because that amount only
applies to Participants whose Affiliated Families have Net Debit
Caps that exceed $2.15 billion. Id. at n.19.
\28\ See id. at 89753. DTC explains that the $200 million buffer
is an amount greater than the contribution of any lender to the DTC
LOC. Id. at n.20.
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DTC conducted an impact study for the period January 3, 2022,
through December 30, 2022 (``Impact Study'').\29\ The Impact Study
determined the liquidity needs across legal entities by looking at
Participants reaching 90% of the current $1.80 billion maximum Net
Debit Cap, identifying the transactions pending under Net Debit Cap
limits, and any incoming SPPs. The Impact Study shows that a number of
Participants currently capped at the $1.80 billion Net Debit Cap would
realize an immediate benefit from the proposed Net Debit Cap increase
since the increase would enable more transactions to process without
the need for a Participant to wait to reduce its intraday Net Debit
Balance through Delivery Versus Payment credits or SPPs, therefore
improving transaction processing.
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\29\ As part of the Proposed Rule Change, DTC filed, as Exhibit
3, the Impact Study. Pursuant to 17 CFR 240.24b-2, DTC requested
confidential treatment of Exhibit 3.
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IV. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act \30\ directs the Commission to
approve a proposed rule change of a self-regulatory organization if it
finds that such proposed rule change is consistent with the
requirements of the Act and rules and regulations thereunder applicable
to such organization. After careful review of the Proposed Rule Change,
the Commission finds that the Proposed Rule Change is consistent with
the requirements of the Act and the rules and regulations thereunder
applicable to DTC. In particular, the Commission finds that the
Proposed Rule Change is consistent with Section 17A(b)(3)(F) of the Act
\31\ and Rule 17Ad-22(e)(7)(i) thereunder.\32\
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\30\ 15 U.S.C. 78s(b)(2)(C).
\31\ 15 U.S.C. 78q-1(b)(3)(F).
\32\ 17 CFR 240.17Ad-22(e)(7)(i).
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A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act requires that the rules of a
clearing agency, such as DTC, be designed to, among other things,
promote the prompt and accurate clearance and settlement of securities
transactions.\33\ The Commission believes that the Proposed Rule Change
is consistent with Section 17A(b)(3)(F) of the Act for the reasons
stated below.
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\33\ 15 U.S.C. 78q-1(b)(3)(F).
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As discussed in Part II, DTC uses the Net Debit Cap as a risk
management control to protect the DTC settlement system in the event of
a Participant default, by limiting the settlement net debit any
Participant can incur at any point during the processing day to an
amount below DTC's liquidity resources. This ensures that DTC maintains
sufficient financial resources to complete settlement in the event of a
failure to settle by the largest Participant or Affiliated Family of
Participants.
Because DTC does not process transactions that would result in a
Participant exceeding its Net Debit Cap and these remain as pending
until the Participant's Net Debit Balance is reduced to where it would
no longer exceed it, increasing the Net Debit Cap would allow more
transactions to process without the need for a Participant to wait for
a reduction of its intraday Net Debit Balance. The Commission has
reviewed and analyzed the filing materials, including the Impact Study,
and agrees that there are a number of Participants that would
immediately benefit from the proposed increase by seeing less of its
transactions pend because the Participant may maintain a higher Net
Debit Cap.
As discussed in Parts II and III, the proposed Net Debit Cap
increase would continue to be supported by sufficient DTC qualifying
liquid resources, since the proposed increase to a $2.15 billion Net
Debit Cap continues to be below the $2.35 billion in liquidity
resources that the $450 million Core Fund and the $1.90 billion LOC
collectively provide. Because the increase in Net Debit Cap should
improve transaction processing while still being covered by DTC
liquidity resources in the event of default, the Commission finds that
the Proposed Rule Change should enhance DTC's ability to provide prompt
and accurate clearance and settlement of securities transactions,
consistent with Section 17A(b)(3)(F) of the Act.
B. Consistency With Rule 17Ad-22(e)(7)(i)
Rule 17Ad-22(e)(7)(i) requires that, among other things, DTC
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 maintaining sufficient
liquid resources at the minimum in all relevant currencies to effect
same-day, and, where appropriate, intraday and multiday 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 DTC in extreme but plausible market
conditions.\34\
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\34\ 17 CFR 240.17Ad-22(e)(7)(i).
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As discussed in Part II, DTC monitors settlement flows and net
debit obligations daily, and employs the Net Debit Cap, among other
tools, to 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
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to protect itself and Participants against liquidity exposure under
normal and stressed market conditions. Specifically, the Net Debit Cap
limits a Participant's net debit settlement obligation to an amount
that can be satisfied with DTC liquidity resources at any point during
DTC's processing day. As discussed in Part III, the proposed increase
in Net Debit Cap from $1.80 billion to $2.15 billion would continue to
be below DTC's available qualifying liquid resources when considering
the Core Fund and LOC collectively, and it would not otherwise alter
the way DTC monitors settlement flows and net debit obligations.
Additionally, as discussed in Part III, the proposed increase continues
to provide a buffer between the liquidity resources and the proposed
$2.15 billion Net Debit Cap that accounts for the possibility that a
defaulting Participant may also be a lender to the LOC. This should
allow DTC to continue to have sufficient liquid resources even when the
defaulting Participant is a lender to the LOC.
For the reasons above, the Commission finds that the Proposed Rule
Change is consistent with Rule 17Ad-22(e)(7)(i) under the Act \35\
because the proposed Net Debit Cap increase would allow DTC to continue
to manage liquidity risks by maintaining sufficient liquid resources to
settle its payment obligations under a wide range of foreseeable stress
scenarios, including the default of the participant family that would
generate the largest aggregate payment obligation for DTC in extreme
but plausible market conditions.
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\35\ Id.
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V. Conclusion
On the basis of the foregoing, the Commission finds that the
Proposed Rule Change is consistent with the requirements of the Act,
and in particular, with the requirements of Section 17A of the Act \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-2023-013, 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 its impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\39\
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\39\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-02420 Filed 2-6-24; 8:45 am]
BILLING CODE 8011-01-P
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