Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices 38357 

65Supra note 41. 

66 17 CFR 240.17Ad–22(e)(3)(ii). 

67 Id. at 240.17Ad–22(e)(15)(ii). 

68 Id. 

1 12 U.S.C. 5465(e)(1) and 17 CFR 240.19b– 

4(n)(1)(i), respectively. On December 18, 2017, DTC 

filed the Advance Notice as a proposed rule change 

(SR–DTC–2017–022) with the Commission 

pursuant to Section 19(b)(1) of the Act and Rule 

19b–4 thereunder (‘‘Proposed Rule Change’’). (17 

CFR 240.19b–4 and 17 CFR 240.19b–4, 

respectively.) The Proposed Rule Change was 

published in the Federal Register on January 8, 

2018. See Securities Exchange Act Release No. 

82426 (January 2, 2018), 83 FR 913 (January 8, 

2018) (SR–DTC–2017–022). On February 8, 2018, 

the Commission designated a longer period within 

which to approve, disapprove, or institute 

proceedings to determine whether to approve or 

disapprove the Proposed Rule Change. See 

Continued 

would be identified and described in its 

Recovery Plan, including the authority 

provided to it in the proposed Force 

Majeure Rule, would meet the criteria 

identified within guidance published by 

the Commission in connection with the 

adoption of Rule 17Ad–22(e)(3)(ii).65

Therefore, DTC believes the R&W 

Plan and each of the Proposed Rules are 

consistent with Rule 17Ad– 

22(e)(3)(ii).66

Rule 17Ad–22(e)(15)(ii) under the Act 

requires DTC to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

identify, monitor, and manage its 

general business risk and hold sufficient 

LNA to cover potential general business 

losses so that DTC can continue 

operations and services as a going 

concern if those losses materialize, 

including by holding LNA equal to the 

greater of either (x) six months of the 

covered clearing agency’s current 

operating expenses, or (y) the amount 

determined by the board of directors to 

be sufficient to ensure a recovery or 

orderly wind-down of critical 

operations and services of the covered 

clearing agency.67 While the Capital 

Policy addresses how DTC holds LNA 

in compliance with these requirements, 

the Wind-down Plan would include an 

analysis that would estimate the amount 

of time and the costs to achieve a 

recovery or orderly wind-down of DTC’s 

critical operations and services, and 

would provide that the Board review 

and approve this analysis and 

estimation annually. The Wind-down 

Plan would also provide that the 

estimate would be the ‘‘Recovery/Winddown Capital Requirement’’ under the 

Capital Policy. Under that policy, the 

General Business Risk Capital 

Requirement, which is the sufficient 

amount of LNA that DTC should hold to 

cover potential general business losses 

so that it can continue operations and 

services as a going concern if those 

losses materialize, is calculated as the 

greatest of three estimated amounts, one 

of which is this Recovery/Wind-down 

Capital Requirement. Therefore, DTC 

believes the R&W Plan, as it interrelates 

with the Capital Policy, is consistent 

with Rule 17Ad–22(e)(15)(ii).68

III. Date of Effectiveness of the Advance 

Notice, and Timing for Commission 

Action 

The proposed change may be 

implemented if the Commission does 

not object to the proposed change 

within 60 days of the later of (i) the date 

that the proposed change was filed with 

the Commission or (ii) the date that any 

additional information requested by the 

Commission is received. The clearing 

agency shall not implement the 

proposed change if the Commission has 

any objection to the proposed change. 

A proposed change may be 

implemented in less than 60 days from 

the date the advance notice is filed, or 

the date further information requested 

by the Commission is received, if the 

Commission notifies the clearing agency 

in writing that it does not object to the 

proposed change and authorizes the 

clearing agency to implement the 

proposed change on an earlier date, 

subject to any conditions imposed by 

the Commission. 

The clearing agency shall post notice 

on its website of proposed changes that 

are implemented. 

The proposal shall not take effect 

until all regulatory actions required 

with respect to the proposal are 

completed. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views and 

arguments concerning the foregoing. 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an email to rule-comments@

sec.gov. Please include File Number SR– 

DTC–2017–803 on the subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Secretary, Securities and Exchange 

Commission, 100 F Street NE, 

Washington, DC 20549–1090. 

All submissions should refer to File 

Number SR–DTC–2017–803. 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 (http://www.sec.gov/ 

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the Advance Notice that 

are filed with the Commission, and all 

written communications relating to the 

Advance Notice between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for website viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street NE, 

Washington, DC 20549 on official 

business days between the hours of 

10:00 a.m. and 3:00 p.m. Copies of the 

filing also will be available for 

inspection and copying at the principal 

office of DTC and on DTCC’s website 

(http://dtcc.com/legal/sec-rulefilings.aspx). All comments received 

will be posted without change. Persons 

submitting comments are cautioned that 

we do not redact or edit personal 

identifying information from comment 

submissions. You should submit only 

information that you wish to make 

available publicly. All submissions 

should refer to File Number SR–DTC– 

2017–803 and should be submitted on 

or before August 21, 2018. 

By the Commission. 

Robert W. Errett, 

Deputy Secretary. 

[FR Doc. 2018–16708 Filed 8–3–18; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–83746; File No. SR–DTC– 

2017–804] 

Self-Regulatory Organizations; The 

Depository Trust Company; Notice of 

Filing of Amendment No. 1 to an 

Advance Notice To Amend the Loss 

Allocation Rules and Make Other 

Changes 

July 31, 2018. 

On December 18, 2017, The 

Depository Trust Company (‘‘DTC’’) 

filed with the Securities and Exchange 

Commission (‘‘Commission’’) advance 

notice SR–DTC–2017–804 (‘‘Advance 

Notice’’) pursuant to Section 806(e)(1) of 

Title VIII of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act 

entitled the Payment, Clearing, and 

Settlement Supervision Act of 2010 

(‘‘Clearing Supervision Act’’) and Rule 

19b–4(n)(1)(i) under the Securities 

Exchange Act of 1934 (‘‘Act’’).1 The 


sradovich on DSK3GMQ082PROD with NOTICES
38358 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices 

Securities Exchange Act Release No. 82670 

(February 8, 2018), 83 FR 6626 (February 14, 2018) 

(SR–DTC–2017–022; SR–FICC–2017–022; SR– 

NSCC–2017–018). On March 20, 2018, the 

Commission instituted proceedings to determine 

whether to approve or disapprove the Proposed 

Rule Change. See Securities Exchange Act Release 

No. 82914 (March 20, 2018), 83 FR 12978 (March 

26, 2018) (SR–DTC–2017–022). On June 25, 2018, 

the Commission designated a longer period for 

Commission action on the proceedings to determine 

whether to approve or disapprove the Proposed 

Rule Change. Therefore, September 5, 2018 is the 

date by which the Commission should either 

approve or disapprove the Proposed Rule Change. 

See Securities Exchange Act Release Nos. 83510 

(June 25, 2018), 83 FR 30791 (June 29, 2018) (SR– 

DTC–2017–022; SR–FICC–2017–022; SR–NSCC– 

2017–018). On June 28, 2018, DTC filed 

Amendment No. 1 to the Proposed Rule Change. 

See Securities Exchange Act Release No. 83629 

(July 13, 2018), 83 FR 34246 (July 19, 2018) (SR– 

DTC–2017–022). As of the date of this release, the 

Commission has not received any comments on the 

Proposed Rule Change. 

2Securities Exchange Act Release No. 82582 

(January 24, 2018), 83 FR 4297 (January 30, 2018) 

(SR–DTC–2017–804). Pursuant to Section 

806(e)(1)(H) of the Clearing Supervision Act, the 

Commission may extend the review period of an 

advance notice for an additional 60 days, if the 

changes proposed in the advance notice raise novel 

or complex issues, subject to the Commission 

providing the clearing agency with prompt written 

notice of the extension. 12 U.S.C. 5465(e)(1)(H). The 

Commission found that the Advance Notice raised 

complex issues and, accordingly, extended the 

review period of the Advance Notice for an 

additional 60 days until April 17, 2018, pursuant 

to Section 806(e)(1)(H). Id. 

3 12 U.S.C. 5465(e)(1)(D); See Memorandum from 

the Office of Clearance and Settlement Supervision, 

Division of Trading and Markets, titled 

‘‘Commission’s Request for Additional 

Information,’’ available at http://www.sec.gov/ 

rules/sro/dtc-an.shtml. 

4To promote the public availability and 

transparency of its post-notice amendment, DTC 

submitted a copy of Amendment No. 1 through the 

Commission’s electronic public comment letter 

mechanism. Accordingly, Amendment No. 1 has 

been posted on the Commission’s website at http:// 

www.sec.gov/rules/sro/dtc-an.shtml and thus been 

publicly available since June 29, 2018. 12 U.S.C. 

5465(e)(1)(E) and (G); see Memorandum from the 

Office of Clearance and Settlement Supervision, 

Division of Trading and Markets, titled ‘‘Response 

to the Commission’s Request for Additional 

Information,’’ available at http://www.sec.gov/ 

rules/sro/dtc-an.shtml. 

5Each capitalized term not otherwise defined 

herein has its respective meaning as set forth in the 

Rules, available at http://www.dtcc.com/legal/rulesand-procedures.aspx. 

6See Securities Exchange Act Release No. 82582 

(January 24, 2018), 83 FR 4297 (January 30, 2018) 

(SR–DTC–2017–804). 

notice of filing and extension of the 

review period of the Advance Notice 

was published for comment in the 

Federal Register on January 30, 2018.2

On April 10, 2018, the Commission 

required additional information from 

DTC pursuant to Section 806(e)(1)(D) of 

the Clearing Supervision Act, which 

tolled the Commission’s period of 

review of the Advance Notice.3 On June 

28, 2018, DTC filed Amendment No. 1 

to the Advance Notice to amend and 

replace in its entirety the Advance 

Notice as originally submitted on 

December 18, 2017, and on July 6, 2018, 

submitted a response to the 

Commission’s request for additional 

information in consideration of the 

Advance Notice, which added a further 

60-days to the review period pursuant to 

Section 806(e)(1)(E) and (G) of the 

Clearing Supervision Act.4

The Advance Notice, as amended by 

Amendment No. 1, is described in Items 

I and II below, which Items have been 

prepared by DTC. The Commission is 

publishing this notice to solicit 

comments on the Advance Notice, as 

amended by Amendment No. 1, from 

interested persons. 

I. Clearing Agency’s Statement of the 

Terms of Substance of the Advance 

Notice 

This advance notice is filed by The 

Depository Trust Company (‘‘DTC’’) in 

connection with proposed modifications 

to the Rules, By-Laws and Organization 

Certificate of DTC (‘‘Rules’’).5 The 

proposed rule change would revise Rule 

4 (Participants Fund and Participants 

Investment) to (i) provide separate 

sections for (x) the use of the 

Participants Fund as a liquidity resource 

for settlement and (y) loss allocation 

among Participants of losses and 

liabilities arising out of Participant 

defaults or due to non-default events; 

and (ii) enhance the resiliency of DTC’s 

loss allocation process so that DTC can 

take timely action to contain multiple 

loss events that occur in succession 

during a short period of time. In 

connection therewith, the proposed rule 

change would (i) align the loss 

allocation rules of the three clearing 

agencies of The Depository Trust & 

Clearing Corporation (‘‘DTCC’’), namely 

DTC, National Securities Clearing 

Corporation (‘‘NSCC’’), and Fixed 

Income Clearing Corporation (‘‘FICC’’) 

(collectively, the ‘‘DTCC Clearing 

Agencies’’), so as to provide consistent 

treatment, to the extent practicable and 

appropriate, especially for firms that are 

participants of two or more DTCC 

Clearing Agencies, (ii) increase 

transparency and accessibility of the 

provisions relating to the use of the 

Participants Fund as a liquidity resource 

for settlement and the loss allocation 

provisions, by enhancing their 

readability and clarity, (iii) require a 

defined corporate contribution to losses 

and liabilities that are incurred by DTC 

prior to any allocation among 

Participants, whether such losses and 

liabilities arise out of Participant 

defaults or due to non-default events, 

(iv) reduce the time within which DTC 

is required to return a former 

Participant’s Actual Participants Fund 

Deposit, and (v) make conforming and 

technical changes. In addition, the 

proposed rule change would amend 

Section 6 of Rule 4 to clarify the 

requirements for a Participant that 

wants to voluntarily terminate its 

business with DTC, and to align, where 

appropriate, with the proposed 

voluntary termination provisions of the 

NSCC and FICC rules. The proposed 

rule change would also amend Rule 1 

(Definitions; Governing Law) to add 

cross-references to terms that would be 

defined in proposed Rule 4, and would 

amend Rule 2 (Participants and 

Pledgees), in relevant part, to align with 

proposed Section 6 of Rule 4, as 

discussed below. 

II. Clearing Agency’s Statement of the 

Purpose of, and Statutory Basis for, the 

Advance Notice 

In its filing with the Commission, the 

clearing agency included statements 

concerning the purpose of and basis for 

the Advance Notice and discussed any 

comments it received on the Advance 

Notice. 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 and B below, of the most 

significant aspects of such statements. 

(A) Clearing Agency’s Statement on 

Comments on the Advance Notice 

Received From Members, Participants, 

or Others 

Written comments relating to this 

proposal have not been solicited or 

received. DTC will notify the 

Commission of any written comments 

received by DTC. 

(B) Advance Notice Filed Pursuant to 

Section 806(e) of the Clearing 

Supervision Act 

Description of Amendment No. 1 

This filing constitutes Amendment 

No. 1 (‘‘Amendment’’) to the Advance 

Notice previously filed by DTC on 

December 18, 2017.6 This Amendment 

amends and replaces the Advance 

Notice in its entirety. DTC submits this 

Amendment in order to further clarify 

the operation of the proposed rule 

changes on loss allocation by providing 

additional information and examples. 

This Amendment would also clarify the 

requirements for a Participant that 

wants to voluntarily terminate its 

business with DTC. In particular, this 

Amendment would: 

(i) Clarify that the term ‘‘Participant 

Default,’’ referring to the failure of a 

Participant to satisfy any obligation to 


sradovich on DSK3GMQ082PROD with NOTICES
Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices 38359 

7Although Rule 4 is being amended to align with 

NSCC and FICC, where appropriate, a ‘‘Defaulting 

Participant’’ is not analogous to a ‘‘Defaulting 

Member’’ under the proposed NSCC and FICC rules. 

This is because the term ‘‘Defaulting Participant’’ 

already has a specific meaning pursuant to Rule 

9(B) which is necessary and appropriate to that 

Rule. Instead, the proposed new term ‘‘CTA 

Participant’’ would be analogous to the NSCC and 

FICC proposed term ‘‘Defaulting Member.’’ 

8On December 18, 2017, NSCC and FICC 

submitted proposed rule changes and advance 

notices to enhance their rules regarding allocation 

of losses. Securities Exchange Act Release Nos. 

82428 (January 2, 2018), 83 FR 897 (January 8, 

2018) (SR–NSCC–2017–018), and 82584 (January 

24, 2018), 83 FR 4377 (January 30, 2018) (SR– 

NSCC–2017–806); Securities Exchange Act Release 

Nos. 82427 (January 2, 2018), 83 FR 854 (January 

8, 2018) (SR–FICC–2017–022) and 82583 (January 

24, 2018), 83 FR 4358 (January 30, 2018) (SR–FICC– 

2017–806). On June 28, 2018, NSCC and FICC filed 

proposed amendments to the proposed rule changes 

and advance notices with the Commission and the 

Board of Governors of the Federal Reserve System, 

respectively, available at http://www.dtcc.com/ 

legal/sec-rule-filings.aspx. 

9 DTC is a central securities depository providing 

key services that are structured to support daily 

settlement of book-entry transfers of securities, in 

accordance with its Rules and Procedures. In 

particular, Rule 9(A) (Transactions in Securities and 

Money Payments), Rule 9(B) (Transactions in 

Eligible Securities), Rule 9(C) (Transactions in MMI 

Securities), Rule 9(D) (Settling Banks), and Rule 

9(E) (Clearing Agency Agreements) provide the 

mechanism to achieve a ‘‘DVP Model 2 Deferred 

Net Settlement System’’ (as defined in Annex D of 

the Principles for Financial Market Infrastructures 

issued by The Committee on Payments and Market 

Infrastructures and the Technical Committee of the 

International Organization of Securities 

Commissions (April 2012), available at https://

www.bis.org/cpmi/publ/d101a.pdf. Briefly, in 

relevant part, Rule 9(B) provides that ‘‘[e]ach 

Participant and the Corporation shall settle the 

balance of the Settlement Account of the Participant 

on a daily basis in accordance with these Rules and 

the Procedures. Except as provided in the 

Procedures, the Corporation shall not be obligated 

to make any settlement payments to any 

Participants until the Corporation has received all 

of the settlement payments that Settling Banks and 

Participants are required to make to the 

Corporation.’’ Supra note 5. Pursuant to these 

provisions of Rule 9(B), securities will be delivered 

to Participants that satisfy their settlement 

obligations in the end-of-day net settlement process. 

DTC, includes the failure of a Defaulting 

Participant to satisfy its obligations as 

provided in Rule 9(B).7

(ii) Add the defined term ‘‘CTA 

Participant,’’ which would be defined as 

a Participant for which the Corporation 

has ceased to act pursuant to Rule 10 

(Discretionary Termination), Rule 11 

(Voluntary Termination) or Rule 12 

(Insolvency). 

(iii) Clarify which Participants would 

be subject to loss allocation with respect 

to Default Loss Events (defined below) 

and Declared Non-Default Loss Events 

(defined below) occurring during an 

Event Period (defined below). 

Specifically, pursuant to the 

Amendment, proposed Section 5 of Rule 

4 would provide that each Participant 

that is a Participant on the first day of 

an Event Period would be obligated to 

pay its pro rata share of losses and 

liabilities arising out of or relating to 

each Default Loss Event (other than a 

Default Loss Event with respect to 

which it is the CTA Participant) and 

each Declared Non-Default Loss Event 

occurring during the Event Period. In 

addition, proposed Section 5 of Rule 4 

would make it clear that any CTA 

Participant for which DTC ceases to act 

on a non-Business Day, triggering an 

Event Period that commences on the 

next Business Day, would be deemed to 

be a Participant on the first day of that 

Event Period. 

(iv) Clarify the obligations and Loss 

Allocation Cap (defined below) of a 

Participant that terminates its business 

with DTC in respect of a loss allocation 

round. Specifically, pursuant to the 

Amendment, the Participant would 

nevertheless remain obligated for its pro 

rata share of losses and liabilities with 

respect to any Event Period for which it 

is otherwise obligated under Rule 4; 

however, its aggregate obligation would 

be limited to the amount of its Loss 

Allocation Cap, as fixed in the loss 

allocation round for which it withdrew. 

(v) Clarify that each CTA Participant 

would be obligated to DTC for the entire 

amount of any loss or liability incurred 

by DTC arising out of or relating to any 

Default Loss Event with respect to such 

CTA Participant. To the extent that such 

loss or liability is not satisfied pursuant 

to proposed Section 3 of Rule 4, DTC 

would apply a Corporate Contribution 

and charge the remaining amount of 

such loss or liability as provided in 

proposed Section 5 of Rule 4. 

(vi) Clarify that, although a CTA 

Participant would not be allocated a 

ratable share of losses and liabilities 

arising out of or relating to its own 

Default Loss Event, it would remain 

obligated to DTC for such losses and 

liabilities. More particularly, pursuant 

to the Amendment, the proposed rule 

change would provide that no loss 

allocation under proposed Rule 4 would 

constitute a waiver of any claim DTC 

may have against a Participant for any 

losses or liabilities to which the 

Participant is subject under DTC Rules 

and Procedures, including, without 

limitation, any loss or liability to which 

it may be subject under proposed Rule 

4. 

(vii) For enhanced transparency and 

to align, where appropriate, with the 

rules of NSCC and FICC, clarify the 

process for the Voluntary Retirement 

(defined below) of a Participant. 

In addition, pursuant to the 

Amendment, DTC is making other 

clarifying and technical changes to the 

proposed rule change, as proposed 

herein. 

Nature of the Proposed Change 

The proposed rule change would 

revise Rule 4 (Participants Fund and 

Participants Investment) to (i) provide 

separate sections for (x) the use of the 

Participants Fund as a liquidity resource 

for settlement and (y) loss allocation 

among Participants of losses and 

liabilities arising out of Participant 

defaults or due to non-default events; 

and (ii) enhance the resiliency of DTC’s 

loss allocation process so that DTC can 

take timely action to contain multiple 

loss events that occur in succession 

during a short period of time. In 

connection therewith, the proposed rule 

change would (i) align the loss 

allocation rules of the DTCC Clearing 

Agencies, so as to provide consistent 

treatment, to the extent practicable and 

appropriate, especially for firms that are 

participants of two or more DTCC 

Clearing Agencies,8 (ii) increase 

transparency and accessibility of the 

provisions relating to the use of the 

Participants Fund as a liquidity resource 

for settlement and the loss allocation 

provisions, by enhancing their 

readability and clarity, (iii) require a 

defined corporate contribution to losses 

and liabilities that are incurred by DTC 

prior to any allocation among 

Participants, whether such losses and 

liabilities arise out of Participant 

defaults or due to non-default events, 

(iv) reduce the time within which DTC 

is required to return a former 

Participant’s Actual Participants Fund 

Deposit, and (v) make conforming and 

technical changes. In addition, the 

proposed rule change would amend 

Section 6 of Rule 4 to clarify the 

requirements for a Participant that 

wants to voluntarily terminate its 

business with DTC, and to align, where 

appropriate, with the proposed 

voluntary termination provisions of the 

NSCC and FICC rules. The proposed 

rule change would also amend Rule 1 

(Definitions; Governing Law) to add 

cross-references to terms that would be 

defined in proposed Rule 4, and would 

amend Rule 2 (Participants and 

Pledgees), in relevant part, to align with 

proposed Section 6 of Rule 4, as 

discussed below. 

(i) Background 

Current Rule 4 provides a single set of 

tools and a common process for the use 

of the Participants Fund for both 

liquidity purposes to complete 

settlement among non-defaulting 

Participants, if one or more Participants 

fails to settle,9 and for the satisfaction of 


sradovich on DSK3GMQ082PROD with NOTICES
38360 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices 

10The failure of a Participant to satisfy its 

settlement obligation constitutes a liability to DTC. 

Insofar as DTC undertakes to complete settlement 

among Participants other than the Participant that 

failed to settle, that liability may give rise to losses 

as well. DTC is designed to provide settlement 

finality at the end of the day and notwithstanding 

the failure to settle of a Participant or Affiliated 

Family of Participants with the largest net 

settlement obligation, a ‘‘cover 1’’ standard. There 

are no reversals of deliveries; a Participant that fails 

to settle will not receive securities that were 

intended to be delivered to it, because it has not 

paid for them. These securities, among others, serve 

as collateral for DTC to use to secure a borrowing 

of funds in order, in accordance with its Rules and 

Procedures, to settle with non-defaulting 

Participants (including those delivering Participants 

that delivered to the non-settling Participant). To 

this end, delivery versus payment transactions 

(‘‘DVP’’) will not be processed intraday to a 

receiving Participant that will incur a related 

payment obligation unless that Participant satisfies 

risk management controls. The two risk 

management controls are the Collateral Monitor and 

Net Debit Cap. Net Debit Caps limit the potential 

settlement obligation of any Participant to an 

amount for which DTC has sufficient liquidity 

resources to cover this risk. The Collateral Monitor 

tests whether a Participant has sufficient collateral 

for DTC to pledge or liquidate if that Participant 

were to fail to meet its settlement obligation. To 

process a DVP, the value of the delivery that is 

debited to the receiving Participant cannot cause 

the net debit balance of the Participant to exceed 

its Net Debit Cap, and the amount of the net debit 

balance after giving effect to the debit must be fully 

collateralized. Accordingly, DTC may incur a 

liability or loss whenever it completes settlement 

despite the failure to settle of a Participant, or 

Affiliated Family of Participants, because it is either 

using the Participants Fund deposits of other 

Participants in the manner specified in existing and 

proposed Rule 4 and/or borrowing the necessary 

funds. DTC obligations under the line of credit 

include the obligation to pay interest on loans 

outstanding and to repay the loan; the Participants 

Fund is designed as not only a direct liquidity 

resource but as a back-up liquidity resource to 

satisfy these liabilities. As to the Participants Fund 

itself, DTC undertakes in Section 9 of existing and 

proposed Rule 4, to restore funds to Participants 

whose deposits may have been charged if there is 

ultimately any excess recovery. It should be noted 

that the Defaulting Participant remains principally 

obligated for all losses, costs and expenses 

associated with its Participant Default and, so, a 

recovery out of the estate of a Defaulting Participant 

is at least a hypothetical possibility. 11Section 1(f) of Rule 4 defines the term 

‘‘business’’ with respect to DTC as ‘‘the doing of all 

things in connection with or relating to the 

Corporation’s performance of the services specified 

in the first and second paragraphs of Rule 6 or the 

cessation of such services.’’ Supra note 5. 

12 It may be noted that absent extreme 

circumstances, DTC believes that it is unlikely that 

DTC would need to act under proposed Sections 4 

or 5 of Rule 4. 

13See Rule 4, Section 5, supra note 5. 

14 It may be noted that for NSCC and FICC, the 

proposed rule changes for loss allocation include a 

‘‘look-back’’ period to calculate a member’s pro rata 

share and cap. The concept of a look-back or 

average is already built into DTC’s calculation of 

Participants Fund requirements, which are based on 

a rolling sixty (60) day average of a Participant’s six 

highest intraday net debit peaks. 

15Each Participant is required to invest in DTC 

Series A Preferred Stock, ratably on a basis 

calculated in substantially the same manner as the 

Required Participants Fund Deposit. The Preferred 

Stock constitutes capital of DTC and is also 

available for use as provided in current and 

proposed Section 3 of Rule 4. This proposed rule 

change does not alter the Required Preferred Stock 

Investment. 

16As part of its liquidity risk management regime, 

DTC maintains a 364-day committed revolving line 

of credit with a syndicate of commercial lenders, 

renewed every year. The committed aggregate 

amount of the End-of-Day Credit Facility (currently 

$1.9 billion) together with the Participants Fund 

constitute DTC’s liquidity resources for settlement. 

Based on these amounts, DTC sets Net Debit Caps 

that limit settlement obligations. 

17 In contrast to NSCC and FICC, DTC is not a 

central counterparty and does not guarantee 

obligations of its membership. The Participants 

Fund is a mutualized pre-funded liquidity and loss 

resource. As such, in contrast to NSCC and FICC, 

DTC does not have an obligation to ‘‘repay’’ the 

Participants Fund, and the application of the 

Participants Fund does not convert to a loss. See 

supra note 10. 

losses and liabilities due to Participant 

defaults 10 or certain other losses or 

liabilities incident to the business of 

DTC.11 The proposed rule change would 

amend and add provisions to separate 

use of the Participants Fund as a 

liquidity resource to complete 

settlement, reflected in proposed 

Section 4 of Rule 4, and for loss 

allocation, reflected in proposed Section 

5 of Rule 4. There wouldn’t be any 

substantive change to the rights and 

obligations of Participants under 

proposed Sections 4 and 5 of Rule 4.12

The proposed rule changes reinforce the 

distinction, conceptual and sequential, 

between the mechanisms to complete 

settlement on a Business Day and to 

mutualize losses that may result from a 

failure to settle, or other loss-generating 

events. The change is also proposed so 

that the loss allocation provisions of 

proposed Section 5 of Rule 4 more 

closely align to similar provisions of the 

NSCC and FICC rules, to the extent 

appropriate. 

The proposed rule change would 

retain the core principles of current 

Rule 4 for both application of the 

Participants Fund as a liquidity resource 

to complete settlement and for loss 

allocation, while clarifying or refining 

certain provisions and introducing 

certain new concepts relating to loss 

allocation. In connection with the use of 

the Participants Fund as a liquidity 

resource to complete settlement when a 

Participant fails to settle, the proposed 

rule would introduce the term ‘‘pro rata 

settlement charge,’’ for the use of the 

Participants Fund to complete 

settlement as apportioned among nondefaulting Participants. The existing 

term generically applied to such a use 

or to a loss allocation is simply a ‘‘pro 

rata charge’’.13

For loss allocation, the proposed rule 

change, like current Rule 4, would 

continue to apply to both default and 

non-default losses and liabilities, and, to 

the extent allocated among Participants, 

would be charged ratably in accordance 

with their Required Participants Fund 

Deposits.14 A new provision would 

require DTC to contribute to a loss or 

liability, either arising from a 

Participant default or non-default event, 

prior to any allocation among 

Participants. The proposed rule change 

would also introduce the new concepts 

of an ‘‘Event Period’’ and a ‘‘round’’ to 

address the allocation of losses arising 

from multiple events that occur in 

succession during a short period of 

time. These proposed rule changes 

would be substantially similar in these 

respects to analogous proposed rule 

changes for NSCC and FICC. 

Current Rule 4 Provides for Application 

of the Participants Fund Through Pro 

Rata Charges 

Current Rule 4 addresses the 

Participants Fund and Participants 

Investment requirements and, among 

other things, the permitted uses of the 

Participants Fund and Participants 

Investment.15 Pursuant to current Rule 

4, DTC maintains a cash Participants 

Fund. The Required Participants Fund 

Deposit for any Participant is based on 

the liquidity risk it poses to DTC 

relative to other Participants. 

Default of a Participant. Under 

current Section 3 of Rule 4, if a 

Participant is obligated to DTC and fails 

to satisfy any obligation, DTC may, in 

such order and in such amounts as DTC 

shall determine in its sole discretion: (a) 

Apply some or all of the Actual 

Participants Fund Deposit of such 

Participant to such obligation; (b) Pledge 

some or all of the shares of Preferred 

Stock of such Participant to its lenders 

as collateral security for a loan under 

the End-of-Day Credit Facility; 16 and/or 

(c) sell some or all of the shares of 

Preferred Stock of such Participant to 

other Participants (who shall be 

required to purchase such shares pro 

rata their Required Preferred Stock 

Investments at the time of such 

purchase), and apply the proceeds of 

such sale to satisfy such obligation. 

Application of the Participants Fund. 

Current Section 4 of Rule 4 addresses 

the application of the Participants Fund 

if DTC incurs a loss or liability, which 

would include application of the 

Participants Fund to complete 

settlement 17 or the allocation of losses 

once determined, including non-default 

losses. For both liquidity and loss 

scenarios, current Section 4 of Rule 4 


sradovich on DSK3GMQ082PROD with NOTICES
Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices 38361 

18Section 2 of Rule 9(A) provides, in part, ‘‘At the 

request of the Corporation, a Participant or Pledgee 

shall immediately furnish the Corporation with 

such assurances as the Corporation shall require of 

the financial ability of the Participant or Pledgee to 

fulfill its commitments and shall conform to any 

conditions which the Corporation deems necessary 

for the protection of the Corporation, other 

Participants or Pledgees, including deposits to the 

Participants Fund . . .’’ Supra note 5. Pursuant to 

the proposed rule change, the additional amount 

that a Participant is required to Deposit to the 

Participants Fund pursuant to Section 2 of Rule 

9(A) would be defined as an ‘‘Additional 

Participants Fund Deposit.’’ This is not a new 

concept, only the addition of a defined term for 

greater clarity. 

19As described above, proposed Rule 4 splits the 

liquidity and loss provisions to more closely align 

to similar loss allocation provisions in NSCC and 

FICC rules. Pursuant to the proposed rule change, 

DTC would also align, where appropriate, the 

liquidity and loss provisions within proposed Rule 

4. DTC would retain the existing Rule 4 concepts 

of calculating the ratable share of a Participant, 

charging each non-defaulting Participant a pro rata 

share of an application of the Participants Fund to 

complete settlement, providing notice to 

Participants of such charge, and providing each 

Participant the option to cap its liability for such 

charges by electing to terminate its business with 

DTC. However, pursuant to the proposed rule 

change, DTC would modify these concepts and 

certain associated processes to more closely align 

with the analogous proposed loss allocation 

provisions in proposed Rule 4 (e.g., Loss Allocation 

Notice, Loss Allocation Termination Notification 

Period, and Loss Allocation Cap). 

20Rule 4, Section 4(a)(1), supra note 5. DTC has 

determined that this option is unnecessary because, 

in practice, DTC would never have liability under 

a Clearing Agency Agreement that exceeds the 

excess assets of the Participant that defaulted. 

21 DTC believes that this change would provide 

an objective date that is more appropriate for the 

application of the Participants Fund to complete 

settlement, because the ‘‘time the loss or liability 

was discovered’’ would necessarily have to be the 

day the Participants Fund was applied to complete 

settlement. 

22 DTC believes this shorter period would be 

sufficient for a Participant to decide whether to give 

notice to terminate its business with DTC in 

response to a settlement charge. In addition, a five 

(5) Business Day pro rata settlement charge 

notification period would conform to the proposed 

loss allocation notification period in this proposed 

rule change and in the proposed rule changes for 

NSCC and FICC. See infra note 37. 

23 DTC believes that setting the start date of the 

notification period to an objective date would 

enhance transparency and provide a common 

timeframe to all affected Participants. 

provides that an application of the 

Participants Fund would be apportioned 

among Participants ratably in 

accordance with their Required 

Participants Fund Deposits, less any 

additional amount that a Participant 

was required to Deposit to the 

Participants Fund pursuant to Section 2 

of Rule 9(A).18 It also provides for the 

optional use of an amount of DTC’s 

retained earnings and undivided profits. 

After the Participants Fund is applied 

pursuant to current Section 4, DTC must 

promptly notify each Participant and 

the Commission of the amount applied 

and the reasons therefor. 

Current Rule 4 further requires 

Participants whose Actual Participants 

Fund Deposits have been ratably 

charged to restore their Required 

Participants Fund Deposits, if such 

charges create a deficiency. Such 

payments are due upon demand. 

Iterative pro rata charges relating to the 

same loss or liability are permitted in 

order to satisfy the loss or liability. 

Rule 4 currently provides that a 

Participant may, within ten (10) 

Business Days after receipt of notice of 

any pro rata charge, notify DTC of its 

election to terminate its business with 

DTC, and the exposure of the 

terminating Participant for pro rata 

charges would be capped at the greater 

of (a) the amount of its Aggregate 

Required Deposit and Investment, as 

fixed immediately prior to the time of 

the first pro rata charge, plus 100% of 

the amount thereof, or (b) the amount of 

all prior pro rata charges attributable to 

the same loss or liability with respect to 

which the Participant has not timely 

exercised its right to terminate. 

Overview of the Proposed Rule Changes 

A. Application of Participants Fund to 

Participant Default and for Settlement 

Proposed Section 3 of Rule 4 would 

retain the concept that when a 

Participant is obligated to DTC and fails 

to satisfy such obligation, which would 

be defined as a ‘‘Participant Default,’’ 

DTC may apply the Actual Participants 

Fund Deposit of the Participant to such 

obligation to satisfy the Participant 

Default. The proposed rule change 

would reflect that the defined term 

‘‘Participant Default,’’ referring to the 

failure of a Participant to satisfy any 

obligation to DTC, includes the failure 

of a Defaulting Participant to satisfy its 

obligations as provided in Rule 9(B) 

(where ‘‘Defaulting Participant’’ is 

defined). The proposed definition of 

‘‘Participant Default’’ is for drafting 

clarity and use in related provisions of 

proposed Rule 4. 

Proposed Section 4 would address the 

situation of a Defaulting Participant 

failure to settle (which is one type of 

Participant Default) if the application of 

the Actual Participants Fund Deposit of 

that Defaulting Participant, pursuant to 

proposed Section 3, is not sufficient to 

complete settlement among Participants 

other than the Defaulting Participant 

(each, a ‘‘non-defaulting Participant’’).19

Proposed Section 4 would expressly 

state that the Participants Fund shall 

constitute a liquidity resource which 

may be applied by DTC, in such 

amounts as it may determine, in its sole 

discretion, to fund settlement among 

non-defaulting Participants in the event 

of the failure of a Defaulting Participant 

to satisfy its settlement obligation on 

any Business Day. Such an application 

of the Participants Fund would be 

charged ratably to the Actual 

Participants Fund Deposits of the nondefaulting Participants on that Business 

Day. The pro rata charge per nondefaulting Participant would be based 

on the ratio of its Required Participants 

Fund Deposit to the sum of the Required 

Participants Fund Deposits of all such 

Participants on that Business Day 

(excluding any Additional Participants 

Fund Deposits in both the numerator 

and denominator of such ratio). The 

proposed rule change would identify 

this as a ‘‘pro rata settlement charge,’’ in 

order to distinguish application of the 

Participants Fund to fund settlement 

from pro rata loss allocation charges that 

would be established in proposed 

Section 5 of Rule 4. 

The calculation of each nondefaulting Participant’s pro rata 

settlement charge would be similar to 

the current Section 4 calculation of a 

pro rata charge except that, for greater 

simplicity, it would not include the 

current distinction for common 

members of another clearing agency 

pursuant to a Clearing Agency 

Agreement.20 For enhanced clarity as to 

the date of determination of the ratio, it 

would be based on the Required 

Participants Fund Deposits as fixed on 

the Business Day of the application of 

the Participants Fund, as opposed to the 

current language ‘‘at the time the loss or 

liability was discovered.’’ 21

The proposed rule change would 

retain the concept that requires DTC, 

following the application of the 

Participants Fund to complete 

settlement, to notify each Participant 

and the Commission of the charge and 

the reasons therefor (‘‘Settlement Charge 

Notice’’). 

The proposed rule change also would 

retain the concept of providing each 

non-defaulting Participant an 

opportunity to elect to terminate its 

business with DTC and thereby cap its 

exposure to further pro rata settlement 

charges. The proposed rule change 

would shorten the notification period 

for the election to terminate from ten 

(10) Business Days to five (5) Business 

Days,22 and would also change the 

beginning date of such notification 

period from the receipt of the notice to 

the date of the issuance of the 

Settlement Charge Notice.23 A 

Participant that elects to terminate its 

business with DTC would, subject to its 

cap, remain responsible for (i) its pro 

rata settlement charge that was the 

subject of the Settlement Charge Notice 


sradovich on DSK3GMQ082PROD with NOTICES
38362 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices 

24Current Section 8 of Rule 4 provides for a cap 

that is equal to the greater of (a) the amount of its 

Aggregate Required Deposit and Investment, as 

fixed immediately prior to the time of the first pro 

rata charge, plus 100% of the amount thereof, or (b) 

the amount of all prior pro rata charges attributable 

to the same loss or liability with respect to which 

the Participant has not timely exercised its right to 

limit its obligation as provided above. Supra note 

5. The alternative limit in clause (b) would be 

eliminated in proposed Section 8(a) in favor of a 

single defined standard. 

25Proposed Sections 3, 4 and 5 of Rule 4 together 

relate, in whole or in part, to what may happen 

when there is a Participant Default. Proposed 

Section 3 is the basic provision of remedies if a 

Participant fails to satisfy an obligation to DTC. 

Proposed Section 4 is a specific remedy for a failure 

to settle by a Defaulting Participant, i.e., a specific 

type of Participant Default. Proposed Section 5 is 

also a remedial provision for a Participant Default 

when, additionally, DTC ceases to act for the 

Participant and there are remaining losses or 

liabilities. If a Participant Default occurs, the 

application of proposed Section 3 would be 

required, the application of proposed Section 4 

would be at the discretion of DTC. Whether or not 

proposed Section 4 has been applied, once there is 

a loss due to a Participant Default and DTC ceases 

to act for the Participant, proposed Section 5 would 

apply. See supra note 10. 

A principal type of Participant Default is a failure 

to settle. A Participant’s obligation to pay any 

amount due in settlement is secured by Collateral 

of the Participant. When the Defaulting Participant 

fails to pay its settlement obligation, under Rule 

9(B), Section 2, DTC has the right to Pledge or sell 

such Collateral to satisfy the obligation. Supra note 

5. (It is more likely that DTC would borrow against 

the Collateral to complete settlement on the 

Business Day, because it is unlikely to be able to 

liquidate Collateral for same day funds in time to 

settle on that Business Day.) If DTC Pledges the 

Collateral to secure a loan to fund settlement (e.g., 

under the End-of-Day Credit Facility), the Collateral 

would have to be sold to obtain funds to repay the 

loan. In any such sale of the Collateral, there is a 

risk, heightened in times of market stress, that the 

proceeds of the sale would be insufficient to repay 

the loan. That deficiency would be a liability or loss 

to which proposed Section 5 of Rule 4 would apply, 

i.e., a Default Loss Event. 

26 DTC calculates its General Business Risk 

Capital Requirement as the amount equal to the 

greatest of (i) an amount determined based on its 

general business profile, (ii) an amount determined 

based on the time estimated to execute a recovery 

or orderly wind-down of DTC’s critical operations, 

and (iii) an amount determined based on an 

analysis of DTC’s estimated operating expenses for 

a six (6) month period. 

27See Securities Exchange Act Release No. 81105 

(July 7, 2017), 82 FR 32399 (July 13, 2017) (SR– 

DTC–2017–003). 

28 17 CFR 240.17Ad–22(e)(15). 

29The proposed rule change would not require a 

Corporate Contribution with respect to a pro rata 

settlement charge. However, as discussed above, if, 

after a Participant Default, the proceeds of the sale 

of the Collateral of the Participant are insufficient 

to repay the lenders under the End-of-Day Credit 

Facility, and DTC has ceased to act for the 

Participant, the shortfall would be a loss arising 

from a Default Loss Event, subject to the Corporate 

Contribution. 

30 DTC believes that two hundred fifty (250) 

Business Days would be a reasonable estimate of 

the time frame that DTC would require to replenish 

the Corporate Contribution by equity in accordance 

with DTC’s Clearing Agency Policy on Capital 

Requirements, including a conservative additional 

period to account for any potential delays and/or 

unknown exigencies in times of distress. 

and (ii) all other pro rata settlement 

charges until the Participant 

Termination Date (as defined below and 

in the proposed rule change). The 

proposed cap on pro rata settlement 

charges of a Participant that has timely 

notified DTC of its election to terminate 

its business with DTC would be the 

amount of its Aggregate Required 

Deposit and Investment, as fixed on the 

day of the pro rata settlement charge 

that was the subject of the Settlement 

Charge Notice, plus 100% of the amount 

thereof (‘‘Settlement Charge Cap’’). The 

proposed Settlement Charge Cap would 

be no greater than the current cap.24

The pro rata application of the Actual 

Participants Fund Deposits of nondefaulting Participants to complete 

settlement when there is a Participant 

Default is not the allocation of a loss. A 

pro rata settlement charge would relate 

solely to the completion of settlement. 

New proposed loss allocation concepts 

described below, including, but not 

limited to, a ‘‘round,’’ ‘‘Event Period,’’ 

and ‘‘Corporate Contribution,’’ would 

not apply to pro rata settlement 

charges.25

B. Changes To Enhance Resiliency of 

DTC’s Loss Allocation Process 

In order to enhance the resiliency of 

DTC’s loss allocation process and to 

align, to the extent practicable and 

appropriate, its loss allocation approach 

to that of the other DTCC Clearing 

Agencies, DTC proposes to introduce 

certain new concepts and to modify 

other aspects of its loss allocation 

waterfall. The proposed rule change 

would adopt an enhanced allocation 

approach for losses, whether arising 

from Default Loss Events or Declared 

Non-Default Loss Events (as defined 

below and in the proposed rule change). 

In addition, the proposed rule change 

would clarify the loss allocation process 

as it relates to losses arising from or 

relating to multiple default or nondefault events in a short period of time. 

Accordingly, DTC is proposing four 

(4) key changes to enhance DTC’s loss 

allocation process: 

(1) Mandatory Corporate Contribution 

Current Section 4 of Rule 4 provides 

that if there is an unsatisfied loss or 

liability, DTC may, in its sole discretion 

and in such amount as DTC would 

determine, ‘‘charge the existing retained 

earnings and undivided profits’’ of DTC. 

Under the proposed rule change, DTC 

would replace the discretionary 

application of an unspecified amount of 

retained earnings and undivided profits 

with a mandatory, defined Corporate 

Contribution (as defined below and in 

the proposed rule change). The 

Corporate Contribution would be used 

for losses and liabilities that are 

incurred by DTC with respect to an 

Event Period (as defined below and in 

the proposed rule change), whether 

arising from a Default Loss Event or 

Declared Non-Default Loss Event, before 

the allocation of losses to Participants. 

The proposed ‘‘Corporate 

Contribution’’ would be defined to be an 

amount equal to fifty percent (50%) of 

DTC’s General Business Risk Capital 

Requirement.26 DTC’s General Business 

Risk Capital Requirement, as defined in 

DTC’s Clearing Agency Policy on 

Capital Requirements,27 is, at a 

minimum, equal to the regulatory 

capital that DTC is required to maintain 

in compliance with Rule 17Ad– 

22(e)(15) under the Securities Exchange 

Act of 1934, as amended (the ‘‘Act’’).28

The proposed Corporate Contribution 

would be held in addition to DTC’s 

General Business Risk Capital 

Requirement. 

The proposed Corporate Contribution 

would apply to losses arising from 

Default Loss Events and Declared NonDefault Loss Events, and would be a 

mandatory contribution of DTC prior to 

any allocation among Participants.29 As 

proposed, if the proposed Corporate 

Contribution is fully or partially used 

against a loss or liability relating to an 

Event Period, the Corporate 

Contribution would be reduced to the 

remaining unused amount, if any, 

during the following two hundred fifty 

(250) Business Days in order to permit 

DTC to replenish the Corporate 

Contribution.30 To ensure transparency, 

Participants would receive notice of any 

such reduction to the Corporate 

Contribution. 

By requiring a defined contribution of 

DTC corporate funds towards losses and 

liabilities arising from Default Loss 

Events and Declared Non-Default Loss 

Events, the proposed rule change would 

limit Participant obligations to the 

extent of such Corporate Contribution 

and thereby provide greater clarity and 

transparency to Participants as to the 

calculation of their exposure to losses 

and liabilities. 

Proposed Rule 4 would also further 

clarify that DTC can voluntarily apply 

amounts greater than the Corporate 

Contribution against any loss or liability 

(including non-default losses) of DTC, if 

the Board of Directors, in its sole 

discretion, believes such to be 

appropriate under the factual situation 

existing at the time. 

The proposed rule changes relating to 

the calculation and mandatory 

application of the Corporate 


sradovich on DSK3GMQ082PROD with NOTICES
Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices 38363 

31 DTC believes that having a ten (10) Business 

Day Event Period would provide a reasonable 

period of time to encompass potential sequential 

Default Loss Events and/or Declared Non-Default 

Loss Events that are likely to be closely linked to 

an initial event and/or a severe market dislocation 

episode, while still providing appropriate certainty 

for Participants concerning their maximum 

exposure to allocated losses with respect to such 

events. 

32As discussed below, each Participant that is a 

Participant on the first day of an Event Period 

would be obligated to pay its pro rata share of losses 

and liabilities arising out of or relating to each 

Default Loss Event (other than a Default Loss Event 

with respect to which it is the CTA Participant) and 

each Declared Non-Default Loss Event occurring 

during the Event Period. 

33See supra note 20. 

34 DTC believes that this change would provide 

an objective date that is appropriate for the new 

proposed loss allocation process, which would be 

designed to allocate aggregate losses relating to an 

Event Period, rather than one loss at a time. 

35 DTC believes allowing Participants two (2) 

Business Days to satisfy their loss allocation 

obligations would provide Participants sufficient 

notice to arrange funding, if necessary, while 

allowing DTC to address losses in a timely manner. 

36Current Section 4 of Rule 4 provides that if the 

Participants Fund is applied to a loss or liability, 

DTC must notify each Participant of the charge and 

the reasons therefor. Proposed Section 5 would 

modify this process to (i) require DTC to give prior 

notice; and (ii) require Participants to pay loss 

allocation charges, rather than directly charging 

their Required Participants Fund Deposits. DTC 

believes that shifting from the two-step 

methodology of applying the Participants Fund and 

then requiring Participants to immediately 

replenish it to requiring direct payment would 

increase efficiency, while preserving the right to 

charge the Settlement Account of the Participant in 

the event the Participant doesn’t timely pay. Such 

a failure to pay would be, self-evidently, a 

Participant Default, triggering recourse to the Actual 

Participants Fund Deposit of the Participant under 

proposed Section 3 of Rule 4. In addition, this 

change would provide greater stability for DTC in 

times of stress by allowing DTC to retain the 

Participants Fund, its critical pre-funded resource, 

while charging loss allocations. DTC believes doing 

so would allow DTC to retain the Participants Fund 

as a liquidity resource which may be applied to 

fund settlement among non-defaulting Participants, 

if a Defaulting Participant fails to settle. By being 

able to manage its liquidity resources throughout 

the loss allocation process, DTC would be able to 

continue to provide its critical operations and 

services during what would be expected to be a 

stressful period. 

Contribution are set forth in proposed 

Section 5 of Rule 4. 

(2) Introducing an Event Period 

The proposed rule change would 

clearly define the obligations of DTC 

and its Participants regarding the 

allocation of losses or liabilities relating 

to or arising out of a Default Loss Event 

or a Declared Non-Default Loss Event. 

The proposed rule change would define 

‘‘Default Loss Event’’ as the 

determination by DTC to cease to act for 

a Participant pursuant to Rule 10, Rule 

11, or Rule 12 (such Participant, a ‘‘CTA 

Participant’’). ‘‘Declared Non-Default 

Loss Event’’ would be defined as the 

determination by the Board of Directors 

that a loss or liability incident to the 

clearance and settlement business of 

DTC may be a significant and 

substantial loss or liability that may 

materially impair the ability of DTC to 

provide clearance and settlement 

services in an orderly manner and will 

potentially generate losses to be 

mutualized among Participants in order 

to ensure that DTC may continue to 

offer clearance and settlement services 

in an orderly manner. In order to 

balance the need to manage the risk of 

sequential loss events against 

Participants’ need for certainty 

concerning maximum loss allocation 

exposures, DTC is proposing to 

introduce the concept of an ‘‘Event 

Period’’ to address the losses and 

liabilities that may arise from or relate 

to multiple Default Loss Events and/or 

Declared Non-Default Loss Events that 

arise in quick succession. Specifically, 

the proposal would group Default Loss 

Events and Declared Non-Default Loss 

Events occurring in a period of ten (10) 

Business Days (‘‘Event Period’’) for 

purposes of allocating losses to 

Participants in one or more rounds, 

subject to the limits of loss allocation set 

forth in the proposed rule change and as 

explained below.31 In the case of a loss 

or liability arising from or relating to a 

Default Loss Event, an Event Period 

would begin on the day on which DTC 

notifies Participants that it has ceased to 

act for a Participant (or the next 

Business Day, if such day is not a 

Business Day). In the case of a Declared 

Non-Default Loss Event, the Event 

Period would begin on the day that DTC 

notifies Participants of the Declared 

Non-Default Loss Event (or the next 

Business Day, if such day is not a 

Business Day). If a subsequent Default 

Loss Event or Declared Non-Default 

Loss Event occurs within the Event 

Period, any losses or liabilities arising 

out of or relating to any such subsequent 

event would be resolved as losses or 

liabilities that are part of the same Event 

Period, without extending the duration 

of such Event Period. An Event Period 

may include both Default Loss Events 

and Declared Non-Default Loss Events, 

and there would not be separate Event 

Periods for Default Loss Events or 

Declared Non-Default Loss Events 

occurring within overlapping ten (10) 

Business Day periods. 

The amount of losses that may be 

allocated by DTC, subject to the 

required Corporate Contribution, and to 

which a Loss Allocation Cap would 

apply for any Participant that elects to 

terminate its business with DTC in 

respect of a loss allocation round, would 

include any and all losses from any 

Default Loss Events and any Declared 

Non-Default Loss Events during the 

Event Period, regardless of the amount 

of time, during or after the Event Period, 

required for such losses to be 

crystallized and allocated.32

The proposed rule changes relating to 

the implementation of an Event Period 

are set forth in proposed Section 5 of 

Rule 4. 

(3) Introducing the Concept of 

‘‘Rounds’’ and Loss Allocation Notice 

Pursuant to the proposed rule change, 

a loss allocation ‘‘round’’ would mean a 

series of loss allocations relating to an 

Event Period, the aggregate amount of 

which is limited by the sum of the Loss 

Allocation Caps of affected Participants 

(a ‘‘round cap’’). When the aggregate 

amount of losses allocated in a round 

equals the round cap, any additional 

losses relating to the applicable Event 

Period would be allocated in one or 

more subsequent rounds, in each case 

subject to a round cap for that round. 

DTC would continue the loss allocation 

process in successive rounds until all 

losses from the Event Period are 

allocated among Participants that have 

not submitted a Termination Notice (as 

defined below and in the proposed rule 

change) in accordance with proposed 

Section 6(b) of Rule 4. 

Each loss allocation would be 

communicated to Participants by the 

issuance of a notice that advises each 

Participant of the amount being 

allocated to it (each, a ‘‘Loss Allocation 

Notice’’). The calculation of each 

Participant’s pro rata allocation charge 

would be similar to the current Section 

4 calculation of a pro rata charge except 

that, for greater simplicity, it would not 

include the current distinction for 

common members of another clearing 

agency pursuant to a Clearing Agency 

Agreement.33 In addition, for enhanced 

clarity as to the date of determination of 

the ratio, it would be based on the 

Required Participants Fund Deposits as 

fixed on the first day of the Event 

Period, as opposed to the current 

language ‘‘at the time the loss or liability 

was discovered.’’34

Each Loss Allocation Notice would 

specify the relevant Event Period and 

the round to which it relates. 

Participants would receive two (2) 

Business Days’ notice of a loss 

allocation,35 and Participants would be 

required to pay the requisite amount no 

later than the second Business Day 

following the issuance of such notice.36

Multiple Loss Allocation Notices may 


sradovich on DSK3GMQ082PROD with NOTICES
38364 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices 

37Current Section 8 of Rule 4 provides that the 

time period for a Participant to give notice of its 

election to terminate its business with DTC in 

respect of a pro rata charge is ten (10) Business Days 

after receiving notice of a pro rata charge. DTC 

believes that it is appropriate to shorten such time 

period from ten (10) Business Days to five (5) 

Business Days because DTC needs timely notice of 

which Participants would not be terminating their 

business with DTC for the purpose of calculating 

the loss allocation for any subsequent round. DTC 

believes that five (5) Business Days would provide 

Participants with sufficient time to decide whether 

to cap their loss allocation obligations by 

terminating their business with DTC. 

38See supra note 23. 

39The alternative limit in clause (b) would be 

eliminated in proposed Section 8(b) in favor of a 

single defined standard. See supra note 24. 

40 i.e., a Participant will only have the 

opportunity to terminate after the first Loss 

Allocation Notice in any round, and not after each 

Loss Allocation Notice in any round. 

be issued with respect to each round, up 

to the round cap. 

The first Loss Allocation Notice in 

any first, second, or subsequent round 

would expressly state that such Loss 

Allocation Notice reflects the beginning 

of the first, second, or subsequent 

round, as the case may be, and that each 

Participant in that round has five (5) 

Business Days 37 from the issuance 38 of 

such first Loss Allocation Notice for the 

round (such period, a ‘‘Loss Allocation 

Termination Notification Period’’) to 

notify DTC of its election to terminate 

its business with DTC (such 

notification, whether with respect to a 

Settlement Charge Notice or Loss 

Allocation Notice, a ‘‘Termination 

Notice’’) pursuant to proposed Section 

8(b) of Rule 4 and thereby benefit from 

its Loss Allocation Cap. 

The round cap of any second or 

subsequent round may differ from the 

first or preceding round cap because 

there may be fewer Participants in a 

second or subsequent round if 

Participants elect to terminate their 

business with DTC as provided in 

proposed Section 8(b) of Rule 4 

following the first Loss Allocation 

Notice in any round. 

For example, for illustrative purposes 

only, after the required Corporate 

Contribution, if DTC has a $4 billion 

loss determined with respect to an 

Event Period and the sum of Loss 

Allocation Caps for all Participants 

subject to the loss allocation is $3 

billion, the first round would begin 

when DTC issues the first Loss 

Allocation Notice for that Event Period. 

DTC could issue one or more Loss 

Allocation Notices for the first round 

until the sum of losses allocated equals 

$3 billion. Once the $3 billion is 

allocated, the first round would end and 

DTC would need a second round in 

order to allocate the remaining $1 

billion of loss. DTC would then issue a 

Loss Allocation Notice for the $1 billion 

and this notice would be the first Loss 

Allocation Notice for the second round. 

The issuance of the Loss Allocation 

Notice for the $1 billion would begin 

the second round. 

The proposed rule change would link 

the Loss Allocation Cap to a round in 

order to provide Participants the option 

to limit their loss allocation exposure at 

the beginning of each round. As 

proposed, a Participant could limit its 

loss allocation exposure to its Loss 

Allocation Cap by providing notice of 

its election to terminate its business 

with DTC within five (5) Business Days 

after the issuance of the first Loss 

Allocation Notice in any round. 

The proposed rule changes relating to 

the implementation of ‘‘rounds’’ and 

Loss Allocation Notices are set forth in 

proposed Section 5 of Rule 4. 

(4) Capping Terminating Participants’ 

Loss Allocation Exposure and Related 

Changes 

As discussed above, the proposed rule 

change would continue to provide 

Participants the opportunity to limit 

their loss allocation exposure by 

offering a termination option; however, 

the associated termination process 

would be modified. 

As proposed, if a Participant timely 

provides notice of its election to 

terminate its business with DTC as 

provided in proposed Section 8(b) of 

Rule 4, its maximum payment 

obligation with respect to any loss 

allocation round would be the amount 

of its Aggregate Required Deposit and 

Investment, as fixed on the first day of 

the Event Period, plus 100% of the 

amount thereof (‘‘Loss Allocation 

Cap’’),39 provided that the Participant 

complies with the requirements of the 

termination process in proposed Section 

6(b) of Rule 4. DTC may retain the entire 

Actual Participants Fund Deposit of a 

Participant subject to loss allocation, up 

to the Participant’s Loss Allocation Cap. 

If a Participant’s Loss Allocation Cap 

exceeds the Participant’s then-current 

Required Participants Fund Deposit, it 

must still pay the excess amount. 

As proposed, Participants would have 

five (5) Business Days from the issuance 

of the first Loss Allocation Notice in any 

round to decide whether to terminate its 

business with DTC, and thereby benefit 

from its Loss Allocation Cap. The start 

of each round 40 would allow a 

Participant the opportunity to notify 

DTC of its election to terminate its 

business with DTC after satisfaction of 

the losses allocated in such round. 

Specifically, the first round and each 

subsequent round of loss allocation 

would allocate losses up to a round cap 

of the aggregate of all Loss Allocation 

Caps of those Participants included in 

the round. If a Participant provides 

notice of its election to terminate its 

business with DTC, it would be subject 

to loss allocation in that round, up to its 

Loss Allocation Cap. If the first round of 

loss allocation does not fully cover 

DTC’s losses, a second round will be 

noticed to those Participants that did 

not elect to terminate in the previous 

round. As noted above, the amount of 

any second or subsequent round cap 

may differ from the first or preceding 

round cap because there may be fewer 

Participants in a second or subsequent 

round if Participants elect to terminate 

their business with DTC as provided in 

proposed Section 8(b) of Rule 4 

following the first Loss Allocation 

Notice in any round. 

Pursuant to the proposed rule change, 

in order to avail itself of its Loss 

Allocation Cap, the Participant would 

need to follow the requirements in 

proposed Section 6(b) of Rule 4. In 

addition to retaining the substance of 

the existing requirements for any 

termination that are set forth in current 

Section 6 of Rule 4, proposed Section 6 

also would provide that a Participant 

that provides a Termination Notice in 

connection with a loss allocation must: 

(1) Specify in the Termination Notice an 

effective date of termination 

(‘‘Participant Termination Date’’), which 

date shall be no later than ten (10) 

Business Days following the last day of 

the applicable Loss Allocation 

Termination Notification Period; (2) 

cease all activities and use of the 

Corporation’s services other than 

activities and services necessary to 

terminate the business of the Participant 

with DTC; and (3) ensure that all 

activities and use of DTC services by 

such Participant cease on or prior to the 

Participant Termination Date. 

The proposed rule changes are 

designed to enable DTC to continue the 

loss allocation process in successive 

rounds until all of DTC’s losses are 

allocated. Until all losses related to an 

Event Period are allocated and paid, 

DTC may retain the entire Actual 

Participants Fund Deposit of a 

Participant subject to loss allocation, up 

to the Participant’s Loss Allocation Cap. 

The proposed rule changes relating to 

capping terminating Participants’ loss 

allocation exposure and related changes 

to the termination process are set forth 

in proposed Sections 5, 6, and 8 of Rule 

4. 


sradovich on DSK3GMQ082PROD with NOTICES
Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices 38365 

41Non-default losses may arise from events such 

as damage to physical assets, a cyber-attack, or 

custody and investment losses. 

42See supra note 11. 

43Section 1 of Rule 2 provides, in relevant part, 

that ‘‘[a] Participant may terminate its business with 

the Corporation by notifying the Corporation as 

provided in Sections 7 or 8 of Rule 4 or, if for a 

reason other than those specified in said Sections 

7 and 8, by notifying the Corporation thereof; the 

Participant shall, upon receipt of such notice by the 

Continued 

C. Clarifying Changes Relating to Loss 

Allocation for Non-Default Events 

The proposed rule changes are 

intended to make the provisions in the 

Rules governing loss allocation more 

transparent and accessible to 

Participants. In particular, DTC is 

proposing the following change relating 

to loss allocation to provide clarity 

around the governance for the allocation 

of losses arising from a non-default 

event.41

Currently, DTC can use the 

Participants Fund to satisfy losses and 

liabilities arising from a Participant 

Default or arising from an event that is 

not due to a Participant Default (i.e., a 

non-default loss), provided that such 

loss or liability is incident to the 

business of DTC.42

DTC is proposing to clarify the 

governance around non-default losses 

that would trigger loss allocation to 

Participants by specifying that the Board 

of Directors would have to determine 

that there is a non-default loss that may 

be a significant and substantial loss or 

liability that may materially impair the 

ability of DTC to provide clearance and 

settlement services in an orderly 

manner and will potentially generate 

losses to be mutualized among the 

Participants in order to ensure that DTC 

may continue to offer clearance and 

settlement services in an orderly 

manner. The proposed rule change 

would provide that DTC would then be 

required to promptly notify Participants 

of this determination, which is referred 

to in the proposed rule as a Declared 

Non-Default Loss Event, as discussed 

above. 

Finally, as previously discussed, 

pursuant to the proposed rule change, 

proposed Rule 4 would include 

language to clarify that (i) the Corporate 

Contribution would apply to losses or 

liabilities arising from a Default Loss 

Event or a Declared Non-Default Loss 

Event, and (ii) the loss allocation 

waterfall would be applied in the same 

manner regardless of whether a loss 

arises from a Default Loss Event or a 

Declared Non-Default Loss Event. 

The proposed rule changes relating to 

Declared Non-Default Loss Events and 

Participants’ obligations for such events 

are set forth in proposed Section 5 of 

Rule 4. 

D. Loss Allocation Waterfall 

Comparison 

The following example illustrates the 

differences between the current and 

proposed loss allocation provisions: 

Assumptions: 

(i) Participant A defaults on a 

Business Day (Day 1). On the same day, 

DTC ceases to act for Participant A, and 

notifies Participants of the cease to act. 

After applying Participant A’s 

Participants Fund and liquidating 

Participant A’s Collateral, DTC has a 

loss of $350 million. 

(ii) Participant X voluntarily retires 

from membership five Business Days 

after DTC ceases to act for Participant A 

(Day 6). 

(iii) Participant B defaults seven 

Business Days after DTC ceases to act 

for Participant A (Day 8). On the same 

day, DTC ceases to act for Participant B, 

and notifies Participants of the cease to 

act. After applying Participant B’s 

Participants Fund and liquidating 

Participant B’s Collateral, DTC has a 

loss of $350 million. 

(iv) The current DTC loss allocation 

provisions do not require a corporate 

contribution. DTC may, in its sole 

discretion and in such amounts as DTC 

may determine, charge the existing 

retained earnings and undivided profits 

of DTC. For the purposes of this 

example, it is assumed that DTC has 

determined, in its discretion, that DTC 

will contribute 25% of its retained 

earnings and undivided profits. The 

amount of DTC’s retained earnings and 

undivided profits is $364 million. 

(v) DTC’s General Business Risk 

Capital Requirement is $158 million. 

Current Loss Allocation: 

Under the current loss allocation 

provisions, with respect to the losses 

arising out of Participant A’s default, 

DTC will contribute $91 million ($364 

million * 25%) from retained earnings 

and undivided profits, and then allocate 

the remaining loss of $259 million ($350 

million ¥ $91 million) to Participants. 

With respect to the losses arising out 

of Participant B’s default, DTC will 

contribute $68 million (($364 million ¥ 

$91 million) * 25%) from the balance of 

its retained earnings and undivided 

profits, and then allocate the remaining 

loss of $282 million ($350 million ¥ 

$68 million) to Participants. Because 

Participant X voluntarily retired before 

DTC ceased to act for Participant B, 

Participant X is not subject to loss 

allocation with respect to losses arising 

out of Participant B’s default. 

Altogether, with respect to the losses 

arising out of defaults of Participant A 

and Participant B, DTC will contribute 

$159 million of retained earnings and 

undivided profits, and will allocate 

losses of $541 million to Participants. 

Proposed Loss Allocation: 

Under the proposed loss allocation 

provisions, a Default Loss Event with 

respect to Participant A’s default would 

have occurred on Day 1, and a Default 

Loss Event with respect to Participant 

B’s default would have occurred on Day 

8. Because the Default Loss Events 

occurred during a 10-Business Day 

period they would be grouped together 

into an Event Period for purposes of 

allocating losses to Participants. The 

Event Period would begin on the 1st 

Business Day and end on the 10th 

Business Day. 

With respect to losses arising out of 

Participant A’s default, DTC would 

apply a Corporate Contribution of $79 

million ($158 million * 50%) and then 

allocate the remaining loss of $271 

million ($350 million ¥ $79 million) to 

Participants. With respect to losses 

arising out of Participant B’s default, 

DTC would not apply a Corporate 

Contribution since it would have 

already contributed the maximum 

Corporate Contribution of 50% of its 

General Business Risk Capital 

Requirement. DTC would allocate the 

loss of $350 million arising out of 

Participant B’s default to Participants. 

Because Participant X was a Participant 

on the first day of the Event Period, it 

would be subject to loss allocation with 

respect to all events occurring during 

the Event Period, even if the event 

occurred after its retirement. Therefore, 

Participant X would be subject to loss 

allocation with respect to Participant B’s 

default. 

Altogether, with respect to the losses 

arising out of defaults of Participant A 

and Participant B, DTC would apply a 

Corporate Contribution of $79 million 

and allocate losses of $621 million to 

Participants. 

The principal differences in the above 

example are due to: (i) The proposed 

changes to the calculation and 

application of Corporate Contribution, 

and (ii) the proposed introduction of an 

Event Period. 

E. Clarifying Changes Regarding 

Voluntary Retirement 

Section 1 of Rule 2 provides that a 

Participant may terminate its business 

with DTC by notifying DTC in the 

appropriate manner.43 To provide 


sradovich on DSK3GMQ082PROD with NOTICES
38366 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices 

Corporation, cease to be a Participant. In the event 

that a Participant shall cease to be a Participant, the 

Corporation shall thereupon cease to make sits 

services available to the Participant, except that the 

Corporation may perform services on behalf of the 

Participant or its successor in interest necessary to 

terminate the business of the Participant or its 

successor with the Corporation, and the Participant 

or its successor shall pay to the Corporation the fees 

and charges provided by these Rules with respect 

to services performed by the Corporation 

subsequent to the time when the Participant ceases 

to be a Participant.’’ Supra note 5. DTC is proposing 

to modify the provision to clarify that the 

termination would be subject to proposed Section 

6 of Rule 4. 

44The requirements would reflect current 

practice. 

45Typically, a Participant would ultimately 

submit a notice after having ceased its transactions 

and transferred all securities out of its Account. 

46The purpose of this proposed provision is to 

clarify that a failure of a Participant to comply with 

proposed Section 6(a) of Rule 4 would mean that 

the Participant would continue to be a Participant, 

as if the Voluntary Retirement Notice had not been 

received by DTC. For example, Participant A 

submits a Voluntary Retirement Notice to DTC on 

April 1st and indicates a Voluntary Retirement Date 

of April 15th, but fails to comply with the 

requirements of proposed Section 6(a) of Rule 4 by 

the Voluntary Retirement Date. The Participant 

would continue to be a Participant after the 

Voluntary Retirement Date. If an Event Period 

subsequently occurs before the Participant submits 

a new Voluntary Retirement Notice and voluntarily 

retires in compliance with proposed Section 6(a), 

such Participant would be obligated to pay its pro 

rata shares of losses and liabilities arising from that 

Event Period. 

additional transparency to Participants 

with respect to the voluntary retirement 

of a Participant, and to align, where 

appropriate, with the proposed rule 

changes of NSCC and FICC with respect 

to voluntary termination, DTC is 

proposing to add proposed Section 6(a) 

to Rule 4, which would be titled, ‘‘Upon 

Any Voluntary Retirement.’’ Proposed 

Section 6(a) of Rule 4 would (i) clarify 

the requirements 44 for a Participant that 

wants to voluntarily terminate its 

business with DTC, and (ii) address the 

situation where a Participant submits a 

Voluntary Retirement Notice (defined 

below) and subsequently receives a 

Settlement Charge Notice or the first 

Loss Allocation Notice in a round on or 

prior to the Voluntary Retirement Date 

(defined below). 

Specifically, DTC is proposing that if 

a Participant elects to terminate its 

business with DTC pursuant to Section 

1 of Rule 2 for reasons other than those 

specified in proposed Section 8 (a 

‘‘Voluntary Retirement’’), the 

Participant would be required to: 

(1) Provide a written notice of such 

termination to DTC (‘‘Voluntary 

Retirement Notice’’), as provided for in 

Section 1 of Rule 2; 

(2) specify in the Voluntary 

Retirement Notice a desired date for the 

termination of its business with DTC 

(‘‘Voluntary Retirement Date’’); 

(3) cease all activities and use of DTC 

services other than activities and 

services necessary to terminate the 

business of the Participant with DTC; 

and 

(4) ensure that all activities and use of 

DTC services by the Participant cease on 

or prior to the Voluntary Retirement 

Date.45

Proposed Section 6(a) of Rule 4 would 

provide that if the Participant fails to 

comply with the requirements of 

proposed Section 6(a), its Voluntary 

Retirement Notice would be deemed 

void.46

Further, proposed Section 6(a) of Rule 

4 would provide that if a Participant 

submits a Voluntary Retirement Notice 

and subsequently receives a Settlement 

Charge Notice or the first Loss 

Allocation Notice in a round on or prior 

to the Voluntary Retirement Date, such 

Participant must timely submit a 

Termination Notice in order to benefit 

from its Settlement Charge Cap or Loss 

Allocation Cap, as the case may be. In 

such a case, the Termination Notice 

would supersede and void the pending 

Voluntary Retirement Notice submitted 

by the Participant. 

F. Changes to the Retention Time for the 

Actual Participants Fund Deposit of a 

Former Participant 

Current Rule 4 provides that after 

three months from when a Person has 

ceased to be a Participant, DTC shall 

return to such Person (or its successor 

in interest or legal representative) the 

amount of the Actual Participants Fund 

Deposit of the former Participant plus 

accrued and unpaid interest to the date 

of such payment (including any amount 

added to the Actual Participants Fund 

Deposit of the former Participant 

through the sale of the Participant’s 

Preferred Stock), provided that DTC 

receives such indemnities and 

guarantees as DTC deems satisfactory 

with respect to the matured and 

contingent obligations of the former 

Participant to DTC. Otherwise, within 

four years after a Person has ceased to 

be a Participant, DTC shall return to 

such Person (or its successor in interest 

or legal representative) the amount of 

the Actual Participants Fund Deposit of 

the former Participant plus accrued and 

unpaid interest to the date of such 

payment, except that DTC may offset 

against such payment the amount of any 

known loss or liability to DTC arising 

out of or related to the obligations of the 

former Participant to DTC. 

DTC is proposing to reduce the time, 

after a Participant ceases to be a 

Participant, at which DTC would be 

required to return the amount of the 

Actual Participants Fund Deposit of the 

former Participant plus accrued and 

unpaid interest, whether the Participant 

ceases to be such because it elected to 

terminate its business with DTC in 

response to a Settlement Charge Notice 

or Loss Allocation Notice or otherwise. 

Pursuant to the proposed rule change, 

the time period would be reduced from 

four (4) years to two (2) years. All other 

requirements relating to the return of 

the Actual Participants Fund Deposit 

would remain the same. 

The four (4) year retention period was 

implemented at a time when there were 

more deposits and processing of 

physical certificates, as well as added 

risks related to manual processing, and 

related claims could surface many years 

after an alleged event. DTC believes that 

the change to two (2) years is 

appropriate because, currently, as DTC 

and the industry continue to move 

toward automation and 

dematerialization, claims typically 

surface more quickly. Therefore, DTC 

believes that a shorter retention period 

of two (2) years would be sufficient to 

maintain a reasonable level of coverage 

for possible claims arising in connection 

with the activities of a former 

Participant, while allowing DTC to 

provide some relief to former 

Participants by returning their Actual 

Participants Fund Deposits more 

quickly. 

(ii) Proposed Rule Changes 

The foregoing changes as well as other 

changes (including a number of 

technical and conforming changes) that 

DTC is proposing in order to improve 

the transparency and accessibility of 

Rule 4 are described in detail below. 

A. Changes Relating To Participant 

Default, Pro Rata Settlement Charges 

and Loss Allocation 

Section 3 

As discussed above, current Section 3 

of Rule 4 provides that, if a Participant 

fails to satisfy an obligation to DTC, 

DTC may, in such order and in such 

amounts as DTC determines, apply the 

Actual Participants Fund Deposit of the 

defaulting Participant, Pledge the shares 

of Preferred Stock of the defaulting 

Participant to its lenders as collateral 

security for a loan, and/or sell the shares 

of Preferred Stock of the defaulting 

Participant to other Participants. 

Pursuant to the proposed rule change, 

Section 3 would retain most of these 

provisions, with the following 

modifications: 


sradovich on DSK3GMQ082PROD with NOTICES
Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices 38367 

47See supra note 20. 

48See supra note 21. 

49See supra note 22. 

50Proposed Section 6(b) is discussed below. 

DTC proposes to add the term 

‘‘Participant Default’’ in proposed 

Section 3 as a defined term for the 

failure of a Participant to satisfy an 

obligation to DTC, for drafting clarity 

and use in related provisions. The 

proposed rule change would reflect that 

the defined term ‘‘Participant Default,’’ 

referring to the failure of a Participant 

to satisfy any obligation to DTC, 

includes the failure of a Defaulting 

Participant to satisfy its obligations as 

provided in Rule 9(B). In addition, the 

proposed rule change clarifies that, in 

the case of a Participant Default, DTC 

would first apply the Actual 

Participants Fund Deposit of the 

Participant to any unsatisfied 

obligations, before taking any other 

actions. This proposed clarification 

would reflect the current practice of 

DTC, and would provide Participants 

with enhanced transparency into the 

actions DTC would take with respect to 

the Participants Fund deposits and 

Participants Investment of a Participant 

that has failed to satisfy its obligations 

to DTC. 

DTC proposes to correct the term 

‘‘End-of-Day Facility,’’ to the existing 

defined term ‘‘End-of-Day Credit 

Facility.’’ DTC further proposes to 

clarify that, if DTC Pledges some or all 

of the shares of Preferred Stock of a 

Participant to its lenders as collateral 

security for a loan under the End-of-Day 

Credit Facility, DTC would apply the 

proceeds of such loan to the obligation 

the Participant had failed to satisfy, 

which is not expressly stated in current 

Section 3 of Rule 4. 

In addition, DTC is proposing to make 

three ministerial changes to enhance 

readability by: (i) Removing the 

duplicative ‘‘in,’’ in the phrase ‘‘in such 

order and in such amounts,’’ (ii) 

replacing the word ‘‘eliminate’’ with 

‘‘satisfy,’’ and (iii) to conform to 

proposed changes, renumbering the list 

of actions that DTC may take when there 

is a Participant Default. 

DTC is also proposing to add the 

heading ‘‘Application of Participants 

Fund Deposits and Preferred Stock 

Investments to Participant Default’’ to 

Section 3. 

Section 4 and Section 5 

As noted above, current Section 4 of 

Rule 4 provides that if DTC incurs a loss 

or liability which is not satisfied by 

charging the Participant responsible for 

the loss pursuant to Section 3 of Rule 4, 

then DTC may, in any order and in any 

amount as DTC may determine, in its 

sole discretion, to the extent necessary 

to satisfy such loss or liability, ratably 

apply some or all of the Actual 

Participants Fund Deposits of all other 

Participants to such loss or liability and/ 

or charge the existing retained earnings 

and undivided profits of DTC. This 

provision relates to losses and liabilities 

that may be due to the failure of a 

Participant to satisfy obligations to DTC, 

if the Actual Participants Fund Deposit 

of that Participant does not fully satisfy 

the obligation, or to losses and liabilities 

for which no single Participant is 

obligated, i.e., a ‘‘non-default loss.’’ 

As discussed above, current Rule 4 

currently provides a single set of tools 

and common processes for using the 

Participants Fund as both a liquidity 

resource and for the satisfaction of other 

losses and liabilities. The proposed rule 

change would provide separate liquidity 

and loss allocation provisions. More 

specifically, proposed Section 4 of Rule 

4 would reflect the process for a ‘‘pro 

rata settlement charge,’’ the application 

of the Actual Participants Fund Deposits 

of non-defaulting Participants for 

liquidity purposes in order to complete 

settlement, when a Defaulting 

Participant fails to satisfy its settlement 

obligation and the amount charged to its 

Actual Participants Fund Deposit by 

DTC pursuant to Section 3 of Rule 4 is 

insufficient to complete settlement. 

Proposed Section 5 of Rule 4 would 

contain the proposed loss allocation 

provisions. 

Proposed Section 4 

Pursuant to the proposed rule change, 

current Section 4 would be replaced in 

its entirety by proposed Section 4, and 

titled ‘‘Application of Participants Fund 

Deposits of Non-Defaulting 

Participants.’’ First, for clarity, proposed 

Section 4 would expressly state that 

‘‘[t]he Participants Fund shall constitute 

a liquidity resource which may be 

applied by the Corporation in such 

amounts as the Corporation shall 

determine, in its sole discretion, to fund 

settlement if there is a Defaulting 

Participant and the amount charged to 

the Actual Participants Fund Deposit of 

the Defaulting Participant pursuant to 

Section 3 of this Rule is not sufficient 

to complete settlement. In that case, the 

Corporation may apply the Actual 

Participants Fund Deposits of 

Participants other than the Defaulting 

Participant (each, a ‘‘non-defaulting 

Participant’’) as provided in this Section 

and/or apply such other liquidity 

resources as may be available to the 

Corporation from time to time, 

including the End-of-Day Credit 

Facility.’’ 

Proposed Section 4 would retain the 

current principle that DTC must notify 

Participants and the Commission when 

it applies the Participants Fund deposits 

of non-defaulting Participants, by 

stating that if the Actual Participants 

Fund Deposits of non-defaulting 

Participants are applied to complete 

settlement, DTC must promptly notify 

each Participant and the Commission of 

the amount of the charge and the 

reasons therefor, and would define such 

notice as a Settlement Charge Notice. 

Proposed Section 4 would retain the 

current calculation of pro rata charges 

by providing that each non-defaulting 

Participant’s pro rata share 47 of any 

such application of the Participants 

Fund, defined as a ‘‘pro rata settlement 

charge,’’ would be equal to (i) its 

Required Participants Fund Deposit, as 

such Required Participants Fund 

Deposit was fixed on the Business Day 

of such application 48 less its Additional 

Participants Fund Deposit, if any, on 

that day, divided by (ii) the sum of the 

Required Participants Fund Deposits of 

all non-defaulting Participants, as such 

Required Participants Fund Deposits 

were fixed on that day, less the sum of 

the Additional Participants Fund 

Deposits, if any, of such non-defaulting 

Participants on that day. 

Proposed Section 4 would also 

provide a period of time within which 

a Participant could notify DTC of its 

election to terminate its business with 

DTC and thereby cap its liability, by 

providing that a Participant would have 

a period of five (5) Business Days 

following the issuance of a Settlement 

Charge Notice (‘‘Settlement Charge 

Termination Notification Period’’) to 

notify DTC of its election to terminate 

its business with DTC pursuant to 

proposed Section 8(a), and thereby 

benefit from its Settlement Charge Cap, 

as set forth in proposed Section 8(a).49

Proposed Section 4 would also require 

that any Participant that gives DTC 

notice of its election to terminate its 

business with DTC must comply with 

proposed Section 6(b) of Rule 4,50 and 

if it does not, its election to terminate 

would be deemed void. 

Proposed Section 4 would further 

provide that DTC may retain the entire 

amount of the Actual Participants Fund 

Deposit of a Participant subject to a pro 

rata settlement charge, up to the amount 

of the Participant’s Settlement Charge 

Cap in accordance with proposed 

Section 8(a) of Rule 4. 

Current Section 5 of Rule 4 provides 

that ‘‘[e]xcept as provided in Section 8 

of this Rule, if a pro rata charge is made 

pursuant to Section 4 of the current 

Rule against the Required Participants 

Fund Deposit of a Participant, and, as a 


sradovich on DSK3GMQ082PROD with NOTICES
38368 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices 

51See supra note 26. 

52See supra note 27. 

53 17 CFR 240.17Ad–22(e)(15). 54See supra note 30. 

consequence, the Actual Participants 

Fund Deposit of such Participant is less 

than its Required Participants Fund 

Deposit, the Participant shall, upon the 

demand of the Corporation, within such 

time as the Corporation shall require, 

Deposit to the Participants Fund the 

amount in cash needed to eliminate any 

resulting deficiency in its Required 

Participants Fund Deposit. If the 

Participant shall fail to make such 

deposit to the Participants Fund, the 

Corporation may take disciplinary 

action against the Participant pursuant 

to these Rules. Any disciplinary action 

which the Corporation takes pursuant to 

these Rules, or the voluntary or 

involuntary cessation of participation by 

the Participant, shall not affect the 

obligations of the Participant to the 

Corporation or any remedy to which the 

Corporation may be entitled under 

applicable law.’’ 

Proposed Section 4 would incorporate 

current Section 5 of Rule 4, modified as 

follows: (i) Conformed to reflect the 

consolidation of Section 5 into proposed 

Section 4, (ii) replacement of ‘‘Except as 

provided in’’ with ‘‘Subject to,’’ to 

harmonize with language used 

elsewhere in proposed Rule 4, and (iii) 

corrections of two typographical errors, 

in order to accurately reflect that the 

Actual Participants Fund Deposit of a 

Participant would be applied, and not 

the Required Participants Fund Deposit, 

and to capitalize the word ‘‘deposit’’ 

because it is a defined term. 

Proposed Section 5 

Proposed Section 5 of Rule 4 would 

address the substantially new and 

revised proposed loss allocation, which 

would apply to losses and liabilities 

relating to or arising out of a Default 

Loss Event or a Declared Non-Default 

Loss Event. Pursuant to the proposed 

rule change, DTC would restructure and 

modify its existing loss allocation 

waterfall as described below. The 

heading ‘‘Loss Allocation Waterfall’’ 

would be added to proposed Section 5. 

Proposed Section 5 would establish 

the concept of an ‘‘Event Period’’ to 

provide for a clear and transparent way 

of handling multiple loss events 

occurring in a period of ten (10) 

Business Days, which would be grouped 

into an Event Period. As stated above, 

both Default Loss Events and Declared 

Non-Default Loss Events could occur 

within the same Event Period. 

The Event Period with respect to a 

Default Loss Event would begin on the 

day on which DTC notifies Participants 

that it has ceased to act for the 

Participant (or the next Business Day, if 

such day is not a Business Day). In the 

case of a Declared Non-Default Loss 

Event, the Event Period would begin on 

the day that DTC notifies Participants of 

the Declared Non-Default Loss Event (or 

the next Business Day, if such day is not 

a Business Day). Proposed Section 5 

would provide that if a subsequent 

Default Loss Event or Declared NonDefault Loss Event occurs during an 

Event Period, any losses or liabilities 

arising out of or relating to any such 

subsequent event would be resolved as 

losses or liabilities that are part of the 

same Event Period, without extending 

the duration of such Event Period. 

As proposed, each CTA Participant 

would be obligated to DTC for the entire 

amount of any loss or liability incurred 

by DTC arising out of or relating to any 

Default Loss Event with respect to such 

CTA Participant. Under the proposal, to 

the extent that such loss or liability is 

not satisfied pursuant to proposed 

Section 3 of Rule 4, DTC would apply 

a Corporate Contribution thereto and 

charge the remaining amount of such 

loss or liability as provided in proposed 

Section 5. 

Under proposed Section 5, the loss 

allocation waterfall would begin with a 

new mandatory Corporate Contribution 

from DTC. Rule 4 currently provides 

that the use of any retained earnings and 

undivided profits by DTC is a voluntary 

contribution of a discretionary amount 

of its retained earnings. Proposed 

Section 5 of Rule 4 would, instead, 

require a defined corporate contribution 

to losses and liabilities that are incurred 

by DTC with respect to an Event Period. 

As proposed, the Corporate 

Contribution to losses or liabilities that 

are incurred by DTC with respect to an 

Event Period would be defined as an 

amount that is equal to fifty percent 

(50%) of the amount calculated by DTC 

in respect of its General Business Risk 

Capital Requirement as of the end of the 

calendar quarter immediately preceding 

the Event Period.51 DTC’s General 

Business Risk Capital Requirement, as 

defined in DTC’s Clearing Agency 

Policy on Capital Requirements,52 is, at 

a minimum, equal to the regulatory 

capital that DTC is required to maintain 

in compliance with Rule 17Ad– 

22(e)(15) under the Act.53

If DTC applies the Corporate 

Contribution to a loss or liability arising 

out of or relating to one or more Default 

Loss Events or Declared Non-Default 

Loss Events relating to an Event Period, 

then for any subsequent Event Periods 

that occur during the next two hundred 

fifty (250) Business Days, the Corporate 

Contribution would be reduced to the 

remaining unused portion of the 

Corporate Contribution amount that was 

applied for the first Event Period.54

Proposed Section 5 would require DTC 

to notify Participants of any such 

reduction to the Corporate Contribution. 

Proposed Section 5 of Rule 4 would 

provide that nothing in the Rules would 

prevent DTC from voluntarily applying 

amounts greater than the Corporate 

Contribution against any DTC loss or 

liability, if the Board of Directors, in its 

sole discretion, believes such to be 

appropriate under the factual situation 

existing at the time. 

Proposed Section 5 of Rule 4 would 

provide that DTC shall apply the 

Corporate Contribution to losses and 

liabilities that arise out of or relate to 

one or more Default Loss Events and/or 

Declared Non-Default Loss Events that 

occur within an Event Period. The 

proposed rule change also provides that 

if losses and liabilities with respect to 

such Event Period remain unsatisfied 

following application of the Corporate 

Contribution, DTC would allocate such 

losses and liabilities to Participants, as 

described below. 

Proposed Section 5 of Rule 4 would 

state that each Participant that is a 

Participant on the first day of an Event 

Period would be obligated to pay its pro 

rata share of losses and liabilities arising 

out of or relating to each Default Loss 

Event (other than a Default Loss Event 

with respect to which it is the CTA 

Participant) and each Declared NonDefault Loss Event occurring during the 

Event Period. In addition, proposed 

Section 5 of Rule 4 would make it clear 

that any CTA Participant for which DTC 

ceases to act on a non-Business Day, 

triggering an Event Period that 

commences on the next Business Day, 

would be deemed to be a Participant on 

the first day of that Event Period. In 

addition, DTC is proposing to clarify 

that after a first round of loss allocations 

with respect to an Event Period, only 

Participants that have not submitted a 

Termination Notice in accordance with 

proposed Section 6(b) of Rule 4 would 

be subject to loss allocations with 

respect to subsequent rounds relating to 

that Event Period. The proposed change 

would also provide that DTC may retain 

the entire Actual Participants Fund 

Deposit of a Participant subject to loss 

allocation, up to the Participant’s Loss 

Allocation Cap in accordance with 

proposed Section 8(b) of Rule 4. 

Pursuant to the proposed rule change, 

DTC would notify Participants subject 

to loss allocation of the amounts being 

allocated to them by a Loss Allocation 

Notice in successive rounds of loss 


sradovich on DSK3GMQ082PROD with NOTICES
Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices 38369 

55 i.e., the Loss Allocation Termination 

Notification Period for that round. 

56See supra note 37. 

57See supra note 20. 

58See supra note 21. 

59See supra note 16. 60See supra note 36. 

allocations. Proposed Section 5 would 

state that a loss allocation ‘‘round’’ 

would mean a series of loss allocations 

relating to an Event Period, the 

aggregate amount of which is limited by 

the sum of the Loss Allocation Caps of 

affected Participants (a ‘‘round cap’’). 

When the aggregate amount of losses 

allocated in a round equals the round 

cap, any additional losses relating to the 

applicable Event Period would be 

allocated in one or more subsequent 

rounds, in each case subject to a round 

cap for that round. DTC may continue 

the loss allocation process in successive 

rounds until all losses from the Event 

Period are allocated among Participants 

that have not submitted a Termination 

Notice in accordance with proposed 

Section 6(b) of Rule 4. 

Each Loss Allocation Notice would 

specify the relevant Event Period and 

the round to which it relates. The first 

Loss Allocation Notice in any first, 

second, or subsequent round would 

expressly state that such Loss Allocation 

Notice reflects the beginning of the first, 

second, or subsequent round, as the case 

may be, and that each Participant in that 

round has five (5) Business Days from 

the issuance of such first Loss 

Allocation Notice for the round 55 to 

notify DTC of its election to terminate 

its business with DTC pursuant to 

proposed Section 8(b) of Rule 4, and 

thereby benefit from its Loss Allocation 

Cap.56

Loss allocation obligations would 

continue to be calculated based upon a 

Participant’s pro rata share of the loss.57

As proposed, each Participant’s pro rata 

share of losses and liabilities to be 

allocated in any round would be equal 

to (i) (A) its Required Participants Fund 

Deposit, as such Required Participants 

Fund Deposit was fixed on the first day 

of the Event Period,58 less (B) its 

Additional Participants Fund Deposit, if 

any, on such day, divided by (ii) (A) the 

sum of the Required Participants Fund 

Deposits of all Participants subject to 

loss allocation in such round, as such 

Required Participants Fund Deposits 

were fixed on such day, less (B) the sum 

of any Additional Participants Fund 

Deposits, if any, of all Participants 

subject to loss allocation in such round 

on such day.59

As proposed, Participants would have 

two (2) Business Days after DTC issues 

a first round Loss Allocation Notice to 

pay the amount specified in any such 

notice. In contrast to the current Section 

4, under which DTC may apply the 

Actual Participants Fund Deposits of 

Participants directly to the satisfaction 

of loss allocation amounts, under 

proposed Section 5, DTC would require 

Participants to pay their loss allocation 

amounts (leaving their Actual 

Participants Fund Deposits intact).60 On 

a subsequent round (i.e., if the first 

round did not cover the entire loss of 

the Event Period because DTC was only 

able to allocate up to the sum of the 

Loss Allocation Caps of those 

Participants included in the round), 

Participants would also have two (2) 

Business Days after notice by DTC to 

pay their loss allocation amounts (again 

subject to their Loss Allocation Caps), 

unless a Participant timely notified (or 

will timely notify) DTC of its election to 

terminate its business with DTC with 

respect to a prior loss allocation round. 

Under the proposal, if a Participant 

fails to make its required payment in 

respect of a Loss Allocation Notice by 

the time such payment is due, DTC 

would have the right to proceed against 

such Participant as a Participant that 

has failed to satisfy an obligation in 

accordance with proposed Section 3 of 

Rule 4 described above. For additional 

clarity, proposed Section 5 of Rule 4 

would state that all amounts due from 

a Participant pursuant to proposed 

Section 5 of Rule 4 may be debited from 

the Settlement Account of such 

Participant. Proposed Section 5 of Rule 

4 would also provide that DTC may 

retain the entire Actual Participants 

Fund Deposit of a Participant subject to 

loss allocation, up to the Participant’s 

Loss Allocation Cap in accordance with 

Section 8(b) of Rule 4. Participants that 

wish to terminate their business with 

DTC would be required to comply with 

the requirements in proposed Section 

6(b) of Rule 4, described further below. 

Specifically, proposed Section 5 would 

provide that if, after notifying DTC of its 

election to terminate its business with 

DTC pursuant to proposed Section 8(b) 

of Rule 4, the Participant fails to comply 

with the provisions of proposed Section 

6(b) of Rule 4, its notice of termination 

would be deemed void and any further 

losses resulting from the applicable 

Event Period may be allocated against it 

as if it had not given such notice. 

Section 6 

Section 6 of Rule 4 currently provides 

that whenever a Participant ceases to be 

such, it continues to be obligated (a) to 

satisfy any deficiency in the amount of 

its Required Participants Fund Deposit 

and/or Required Preferred Stock 

Investment that it did not satisfy prior 

to such time, including (i) any 

deficiency resulting from a pro rata 

charge with respect to which the 

Participant has given notice to DTC of 

its election to terminate its business 

with DTC pursuant to Section 8 of Rule 

4 and (ii) any deficiency the Participant 

is required to satisfy pursuant to 

Sections 3 (an obligation that a 

Participant failed to satisfy) or 5 (the 

requirement of a Participant to eliminate 

the deficiency in its Required 

Participants Fund Deposit) of Rule 4 

and (b) to discharge any liability of the 

Participant to DTC resulting from the 

transactions of the Participant open at 

the time it ceases to be a Participant or 

on account of transactions occurring 

while it was a Participant. 

The heading ‘‘Obligations of 

Participant Upon Termination’’ would 

be added to Section 6 of Rule 4. As 

discussed above, DTC is proposing to 

add proposed Section 6(a) to Rule 4, 

which would (i) clarify the requirements 

for the Voluntary Retirement of a 

Participant, and (ii) address the 

situation where a Participant submits a 

Voluntary Retirement Notice and 

subsequently receives a Settlement 

Charge Cap or the first Loss Allocation 

Notice in a round on or prior to the 

Voluntary Retirement Date. Proposed 

Section 6(a) of Rule 4 would also 

provide that if a Participant submits a 

Voluntary Retirement Notice and 

subsequently receives a Settlement 

Charge Notice or the first Loss 

Allocation Notice in a round on or prior 

to the Voluntary Retirement Date, such 

Participant must timely submit a 

Termination Notice in order to benefit 

from its Settlement Charge Cap or Loss 

Allocation Cap, respectively. In such a 

case, the Termination Notice would 

supersede and void the pending 

Voluntary Retirement Notice submitted 

by the Participant. 

DTC is proposing to add Proposed 

Section 6(b), titled ‘‘Upon Termination 

Following Settlement Charge or Loss 

Allocation.’’ Proposed Section 6(b) 

would state that if a Participant timely 

notifies DTC of its election to terminate 

its business with DTC in respect of a pro 

rata settlement charge as set forth in 

proposed Section 4 of Rule 4 or a loss 

allocation as set forth in proposed 

Section 5 of Rule 4, defined as a 

‘‘Termination Notice’’, the Participant 

would be required to: (1) Specify in the 

Termination Notice a Participant 

Termination Date, which date shall be 

no later than ten Business Days 

following the last day of the applicable 

Settlement Charge Termination 

Notification Period or Loss Allocation 

Termination Notification Period; (2) 


sradovich on DSK3GMQ082PROD with NOTICES
38370 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices 

61See supra note 24. 

62See supra note 39. 

63This is a ministerial change because this 

paragraph currently applies to current Section 4 of 

Rule 4, which includes charges to complete 

settlement and for loss allocation, as would be 

provided in proposed Section 4 and proposed 

Section 5 of 

Rule 4. 

64This is a ministerial change because Section 9 

currently applies to current Section 4 of Rule 4, 

which includes charges to complete settlement and 

for loss allocation, as would be provided in 

proposed Section 4 and proposed Section 5 of Rule 

4. 

cease all activities and use of the 

Corporation’s services other than 

activities and services necessary to 

terminate the business of the Participant 

with DTC; and (3) ensure that all 

activities and use of DTC services by 

such Participant cease on or prior to the 

Participant Termination Date. 

Proposed Section 6(b) of Rule 4 would 

provide that a Participant that 

terminates its business with DTC in 

compliance with proposed Section 6(b) 

would remain obligated for its pro rata 

share of losses and liabilities with 

respect to any Event Period for which it 

is otherwise obligated; however, its 

aggregate obligation would be limited to 

the amount of its Loss Allocation Cap 

(as fixed in the round for which it 

withdrew). 

DTC is proposing to include a 

sentence in proposed Section 6(b) to 

make it clear that if the Participant fails 

to comply with the requirements set 

forth in this section, its Termination 

Notice will be deemed void, and the 

Participant will remain subject to 

further pro rata settlement charges 

pursuant to proposed Section 4 of Rule 

4 or loss allocations pursuant to 

proposed Section 5 of Rule 4, as 

applicable, as if it had not given such 

notice. 

For clarity, DTC is proposing to 

consolidate the requirements from 

current Section 6 of Rule 4 into 

proposed Section 6(c) of Rule 4, titled 

‘‘After Any Termination,’’ and modify 

them to conform to other proposed rule 

changes. In particular, DTC is proposing 

to clarify that a Participant that ceases 

to be such would continue to be subject 

to proposed Section 5 of Rule 4 for any 

Event Period for which it was a 

Participant on the first day of the Event 

Period. Proposed Section 6(c) of Rule 4 

would state that whenever a Participant 

ceases to be such, it would continue to 

be obligated (i) to satisfy any deficiency 

in the amounts of its Required 

Participants Fund Deposit and/or 

Required Preferred Stock Investment 

that it did not satisfy prior to such time, 

including any deficiency the Participant 

is required to satisfy pursuant to 

proposed Sections 3 or 4 of Rule 4, (ii) 

subject to proposed Section 8, to satisfy 

any loss allocation pursuant to proposed 

Section 5 of Rule 4, and (iii) to 

discharge any liability of the Participant 

to DTC resulting from the transactions 

of the Participant open at the time it 

ceases to be a Participant or on account 

of transactions occurring while it was a 

Participant. 

Section 8 

Pursuant to the proposed rule change, 

Section 8 would be titled ‘‘Termination; 

Obligation for Pro Rata Settlement 

Charges and Loss Allocations,’’ and 

would be divided among proposed 

Section 8(a) ‘‘Settlement Charges,’’ 

proposed Section 8(b) ‘‘Loss 

Allocations,’’ proposed Section 8(c) 

‘‘Maximum Obligation,’’ and proposed 

Section 8(d) ‘‘Obligation to Replenish 

Deposit.’’ 

Pursuant to proposed Section 8(a), if 

a Participant, within five (5) Business 

Days after issuance of a Settlement 

Charge Notice pursuant to proposed 

Section 4 of Rule 4, gives notice to DTC 

of its election to terminate its business 

with DTC, the Participant would remain 

obligated for (i) its pro rata settlement 

charge that was the subject of such 

Settlement Charge Notice and (ii) all 

other pro rata settlement charges made 

by DTC until the Participant 

Termination Date. Subject to proposed 

Section 8(c), the terminating 

Participant’s obligation would be 

limited to the amount of its Aggregate 

Required Deposit and Investment, as 

fixed on the day of the pro rata 

settlement charge that was the subject of 

the Settlement Charge Notice, plus 

100% of the amount thereof, which is 

substantively the same limitation as 

provided for pro rata charges in current 

Section 8 of Rule 4.61

Pursuant to proposed Section 8(b), if 

a Participant, within five (5) Business 

Days after the issuance of a first Loss 

Allocation Notice for any round 

pursuant to proposed Section 5 of Rule 

4 gives notice to DTC of its election to 

terminate its business with DTC, the 

Participant would remain liable for (i) 

the loss allocation that was the subject 

of such notice and (ii) all other loss 

allocations made by DTC with respect to 

the same Event Period. Subject to 

proposed Section 8(c), the obligation of 

a Participant which elects to terminate 

its business with DTC would be limited 

to the amount of its Aggregate Required 

Deposit and Investment, as fixed on the 

first day of the Event Period, plus 100% 

of the amount thereof, which is 

substantively the same limitation as 

provided for pro rata charges in current 

Section 8 of Rule 4.62

Proposed Section 8(c) would provide 

that under no circumstances would the 

aggregate obligation of a Participant 

under proposed Section 8(a) and 

proposed Section 8(b) exceed the 

amount of its Aggregate Required 

Deposit and Investment, as fixed on the 

earlier of the (i) day of the pro rata 

settlement charge that was the subject of 

the Settlement Charge Notice giving rise 

to a Termination Notice, and (ii) first 

day of the Event Period that was the 

subject of the first Loss Allocation 

Notice in a round giving rise to a 

Termination Notice, plus 100% of the 

amount thereof. The purpose of 

proposed Section 8(c) is to address a 

situation where a Participant could 

otherwise be subject to both a 

Settlement Charge Cap and Loss 

Allocation Cap. 

Proposed Section 8(d) would retain 

the last paragraph in current Section 8 

of Rule 4, replacing ‘‘pro rata charge’’ 

with ‘‘pro rata settlement charge’’ and 

‘‘loss allocation.’’ 63 Proposed Section 

8(d) would provide that if the amount 

of the Actual Participants Fund Deposit 

of a Participant is insufficient to satisfy 

a pro rata settlement charge pursuant to 

proposed Section 4 and proposed 

Section 8(a) or a loss allocation 

pursuant to proposed Section 5 and 

proposed Section 8(b), the Participant 

would be obligated to Deposit the 

amount of any such deficiency to the 

Participants Fund notwithstanding the 

fact that the Participant subsequently 

ceases to be a Participant. 

Section 9 

Pursuant to the proposed rule change, 

proposed Section 9 of Rule 4 would 

provide that the recovery and 

repayment provisions in current Rule 4 

apply to both pro rata settlement 

charges and loss allocations.64

Specifically, proposed Section 9 would 

provide that if an amount is charged 

ratably pursuant to proposed Section 4 

or allocated ratably pursuant to 

proposed Section 5 and such amount is 

recovered by DTC, in whole or in part, 

the net amount of the recovery shall be 

repaid ratably (on the same basis that it 

was originally charged or allocated) to 

the Persons against which the amount 

was originally charged or allocated by 

(i) crediting the appropriate amounts to 

the Actual Participants Fund Deposits of 

Persons which are still Participants and 

(ii) paying the appropriate amounts in 

cash to Persons which are not still 

Participants. In addition, proposed 

Section 9 would clarify that no loss 

allocation under proposed Rule 4 would 

constitute a waiver of any claim DTC 

may have against a Participant for any 


sradovich on DSK3GMQ082PROD with NOTICES
Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices 38371 

65On December 18, 2017, DTC submitted a 

proposed rule change and advance notice to adopt 

the Recovery & Wind-down Plan of DTC, and 

amend the Rules in order to adopt Rule 32(A) 

(Wind-down of the Corporation) and Rule 38 

(Market Disruption and Force Majeure). See 

Securities Exchange Act Release Nos. 82432 

(January 2, 2018), 83 FR 884 (January 8, 2018) (SR– 

DTC–2017–021) and 82579 (January 24, 2018), 83 

FR 4310 (January 30, 2018) (SR–DTC–2017–803). 

On June 28, 2018, DTC filed amendments to the 

proposed rule change and advance notice with the 

Commission and the Board of Governors of the 

Federal Reserve System, respectively, available at 

http://www.dtcc.com/legal/sec-rule-filings.aspx. 

66See Securities Exchange Act Release No. 79528 

(December 12, 2016), 81 FR 91232 (December 16, 

2016) (SR–DTC–2016–007). The Clearing Agency 

Investment Policy (the ‘‘Policy’’) governs the 

management, custody, and investment of cash 

deposited to the Participants Fund, the proprietary 

liquid net assets (cash and cash equivalents) of DTC 

and other funds held by DTC. The Policy sets forth 

guiding principles for the investment of those 

funds, which include adherence to a conservative 

investment philosophy that places the highest 

priority on maximizing liquidity and avoiding risk, 

as well as mandating the segregation and separation 

of funds. The Policy also addresses the process for 

evaluating credit ratings of counterparties and 

identifies permitted investments within specified 

parameters. In general, assets are required to be 

held by regulated and creditworthy financial 

institution counterparties and invested in financial 

instruments that, with respect to the Participants 

Fund, may include deposits with banks, including 

the Federal Reserve Bank of New York, 

collateralized reverse-repurchase agreements, direct 

obligations of the U.S. government and moneymarket mutual funds. 

losses or liabilities to which the 

Participant is subject under DTC Rules 

and Procedures, including, without 

limitation, any loss or liability to which 

it may be subject under proposed 

Rule 4. 

DTC further proposes to add the 

heading ‘‘No Waiver; Recovery and 

Repayment’’ to proposed Section 9. 

B. Other Proposed Clarifying, 

Conforming and Technical Changes to 

Rule 4 

Section 1 

Section 1(a) and Section 1(b). Section 

1(a) addresses, among other things, the 

formula for determining the Required 

Participants Fund Deposits of 

Participants. DTC is proposing to insert 

the words ‘‘or wind-down’’ to make it 

clear that the formulas for determining 

the Required Participants Fund Deposits 

of Participants and the amount of the 

minimum Required Participants Fund 

Deposit would be fixed by DTC so as to 

assure that the aggregate amount of 

Required Participants Fund Deposits of 

Participants will be increased to provide 

for the costs and expenses incurred by 

it incidental to the wind-down of DTC, 

in addition to the voluntary liquidation 

of DTC.65 Further, DTC proposes to 

delete the extraneous phrase ‘‘if any.’’ 

For increased clarity and readability, 

DTC is proposing to consolidate Section 

1(b) into Section 1(a), and to relocate the 

sentences ‘‘The Corporation may require 

a Participant to Deposit an additional 

amount to the Participants Fund 

pursuant to Section 2 of Rule 9(A). Any 

such additional amount shall be part of 

the Required Participants Fund Deposit 

of such Participant.’’ from Section 1(a) 

to a new proposed Section 1(b). In 

addition to the relocation, DTC would 

add a defined term for such additional 

amount, as ‘‘Additional Participants 

Fund Deposit,’’ for drafting convenience 

and transparency throughout proposed 

Rule 4. Further, DTC proposes to add 

the headings ‘‘Required Participants 

Fund Deposits’’ and ‘‘Additional 

Participants Fund Deposits’’ to Section 

1(a) and proposed Section 1(b), 

respectively. 

Section 1(c). For enhanced 

readability, DTC is proposing to add the 

heading ‘‘Voluntary Participants Fund 

Deposits’’ to Section 1(c) of Rule 4, and 

to replace the word ‘‘as’’ with ‘‘in the 

manner.’’ 

Section 1(d). For enhanced clarity, 

DTC is proposing to modify Section 1(d) 

to make it clear that any Additional 

Participants Fund Deposit is required to 

be in cash. DTC is also proposing to 

delete the extraneous phrase ‘‘pursuant 

to this Section’’ and to replace language 

regarding Section 2 of Rule 9(A) with 

the proposed defined term ‘‘Additional 

Participants Fund Deposit.’’ Further, 

DTC proposes to add the heading ‘‘Cash 

Participants Fund’’ to Section 1(d) of 

Rule 4. 

Section 1(e). For enhanced clarity, 

DTC is proposing to add the language 

‘‘among Account Families’’ to clarify the 

scope of the allocation described in 

Section 1(e). In addition, DTC proposes 

to add the heading ‘‘Allocation of 

Participants Fund Deposits Among 

Account Families’’ to Section 1(e) of 

Rule 4. 

Section 1(f). Section 1(f) addresses, 

among other things, the permitted use of 

the Participants Fund. For consistency 

with the balance of Section 1(f), the first 

paragraph would be amended to state 

that the Actual Participants Fund 

Deposits of Participants ‘‘may be used or 

invested’’ instead of stating ‘‘shall be 

applied.’’ Section 1(f) provides, in part, 

that the Participants Fund is limited to 

the satisfaction of losses or liabilities of 

DTC incident to the business of DTC. 

Section 1(f) currently defines 

‘‘business’’ with respect to DTC as ‘‘the 

doing of all things in connection with or 

relating to [DTC’s] performance of the 

services specified in the first and second 

paragraphs of Rule 6 or the cessation of 

such services.’’ For enhanced 

transparency of the permitted uses of 

the Participants Fund, proposed Section 

1(f) would be amended to explicitly 

state that the Actual Participants Fund 

Deposits of Participants may be used (i) 

to satisfy the obligations of Participants 

to DTC, as provided in proposed Section 

3, (ii) to fund settlement among nondefaulting Participants, as provided in 

proposed Section 4 and (iii) to satisfy 

losses and liabilities of DTC incident to 

the business of DTC, as provided in 

proposed Section 5. Section 1(f) would 

also be amended to make the definition 

of ‘‘business’’ applicable to the entirety 

of Rule 4, instead of just Section 1(f), as 

the term would appear elsewhere in the 

rule pursuant to the proposed rule 

change. In addition, DTC proposes to 

add the heading ‘‘Maintenance, 

Permitted Use and Investment of 

Participants Fund’’ to Section 1(f) of 

Rule 4. 

Section 1(g) (consolidated into 

proposed Section 1(f)). Pursuant to the 

proposed rule change, DTC would 

consolidate current Section 1(g) into 

proposed Section 1(f), and modify 

language to make it clear that DTC may 

invest cash in the Participants Fund in 

accordance with the Clearing Agency 

Investment Policy adopted by DTC.66

Further, language would be streamlined 

by replacing ‘‘securities, repurchase 

agreements or deposits’’ with ‘‘financial 

assets,’’ and ‘‘securities and repurchase 

agreements in which such cash is 

invested’’ with ‘‘its investment of such 

cash.’’ 

Section 1(h) (proposed Section 1(g)). 

As discussed above, DTC is proposing to 

replace ‘‘four’’ years with ‘‘two’’ years, 

in order to reduce the time within 

which DTC would be required to return 

the Actual Participants Fund Deposit of 

a former Participant. In addition, DTC is 

proposing to (i) add the heading ‘‘Return 

of Participants Fund Deposits to 

Participants’’ to proposed Section 1(g), 

(ii) update a cross reference, and (iii) 

correct two typographical errors. 

Section 2 

Pursuant to the proposed rule change, 

Section 2 of Rule 4 would be titled 

‘‘Participants Investment.’’ 

Section 2(a)–2(d) (Proposed Section 

2(a)). For clarity, DTC is proposing to 

consolidate Sections 2(b)–2(d) into 

proposed Section 2(a) and would add 

the heading ‘‘Required Preferred Stock 

Investments’’ to proposed Section 2(a). 

In addition, DTC proposes to modify 

certain language to update references 

and cross-references to specific 

subsections to reflect the proposed 

changes to the numbering of the 


sradovich on DSK3GMQ082PROD with NOTICES
38372 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices 

subsections in proposed Section 2 of 

Rule 4. 

Section 2(e) (Proposed Section 2(b)). 

For enhanced clarity, DTC is proposing 

to add the language ‘‘among Account 

Families’’ to clarify the scope of the 

allocation described in proposed 

Section 2(b). In addition, DTC proposes 

to add the heading ‘‘Allocation of 

Preferred Stock Investments Among 

Account Families’’ to proposed Section 

2(b) of Rule 4. 

Section 2(f) (Proposed Section 2(c)). 

DTC is proposing to add language to 

clarify that when any Pledge of a 

Preferred Stock Security Interest 

pursuant to proposed Section 2(c) of 

Rule 4 is made by appropriate entries on 

the books of DTC, the Rules, in addition 

to such entries, shall be deemed to be 

a security agreement for purposes of the 

New York Uniform Commercial Code. 

In addition, DTC proposes to update a 

cross-reference to proposed Section 2(c). 

In addition, DTC proposes to add the 

heading ‘‘Security Interest in Preferred 

Stock Investments of Participants’’ to 

proposed Section 2(c). 

Sections 2(g)–2(i) (Proposed Sections 

2(d)–2(f)). DTC proposes to add the 

headings ‘‘Dividends on Preferred Stock 

Investments of Participants,’’ ‘‘Sale of 

Preferred Stock Investments of 

Participants,’’ and ‘‘Permitted Transfers 

of Preferred Stock Investments of 

Participants’’ to proposed Sections 2(d), 

2(e), and 2(f), respectively. Proposed 

Sections 2(e) and 2(f) would be 

modified to update cross-references to 

certain subsections. In addition, 

proposed Section 2(f) would be 

modified to renumber paragraphs and 

internal lists for consistency with the 

numbering schemes in Rule 4. 

Section 7. For clarity, DTC is 

proposing to amend Section 7 of Rule 4 

to (i) replace language referencing 

Additional Participants Fund Deposits 

with the proposed defined term, (ii) 

update cross-references to reflect 

proposed renumbering, and (iii) add the 

headings ‘‘Increased Participants Fund 

Deposits and Preferred Stock 

Investments,’’ ‘‘Required Participants 

Fund Deposits,’’ and ‘‘Required 

Preferred Stock Investments’’ to 

proposed Sections 7, 7(a) and 7(b) of 

Rule 4, respectively. 

C. Proposed Changes to Rule 1 

DTC is proposing to amend Rule 1 

(Definitions; Governing Law) to add 

cross-references to proposed terms that 

would be defined in Rule 4, and to 

delete one defined term. The defined 

terms to be added are: ‘‘Additional 

Participants Fund Deposit,’’ ‘‘Corporate 

Contribution,’’ ‘‘CTA Participant,’’ 

‘‘Declared Non-Default Loss Event,’’ 

‘‘Default Loss Event,’’ ‘‘Event Period,’’ 

‘‘Loss Allocation Cap,’’ ‘‘Loss Allocation 

Notice,’’ ‘‘Loss Allocation Termination 

Notification Period,’’ ‘‘Participant 

Default,’’ ‘‘Participant Termination 

Date,’’ ‘‘Settlement Charge Cap,’’ 

‘‘Settlement Charge Notice,’’ 

‘‘Settlement Charge Termination 

Notification Period,’’ ‘‘Termination 

Notice,’’ ‘‘Voluntary Retirement,’’ 

Voluntary Retirement Date,’’ and 

‘‘Voluntary Retirement Notice’’. The 

term ‘‘Section 8 Pro Rata Charge’’ would 

be deleted from Rule 1, because it 

would be deleted from proposed Rule 4 

as no longer necessary. 

D. Proposed Changes to Rule 2 

Section 1. The proposed rule change 

would modify Section 1 of Rule 2 by 

adding ‘‘subject to Section 6 of Rule 4’’ 

to the end of the following provision: 

‘‘A Participant may terminate its 

business with the Corporation by 

notifying the Corporation as provided in 

Sections 7 or 8 of Rule 4 or, if for a 

reason other than those specified in said 

Sections 7 and 8, by notifying the 

Corporation thereof; the Participant 

shall, upon receipt of such notice by the 

Corporation, cease to be a Participant.’’ 

DTC is proposing to add this language 

in order to clarify that the termination 

would be subject to the requirements in 

proposed Section 6 of Rule 4. 

Participant Outreach 

Beginning in August 2017, DTC has 

conducted outreach to Participants in 

order to provide them with advance 

notice of the proposed changes. As of 

the date of this filing, no written 

comments relating to the proposed 

changes have been received in response 

to this outreach. The Commission will 

be notified of any written comments 

received. 

Implementation Timeframe 

Pending Commission approval, DTC 

expects to implement this proposal 

within two (2) Business Days after 

approval. Participants would be advised 

of the implementation date of this 

proposal through issuance of a DTC 

Important Notice. 

Expected Effect on Risks to the Clearing 

Agency, Its Participants and the Market 

DTC believes that the proposed rule 

changes to clarify the remedies available 

to DTC with respect to a Participant 

Default, including the application of the 

Participants Fund as a liquidity 

resource, and by clarifying and 

providing the related processes, would 

provide clarity as to the application of 

the Participants Fund to fund settlement 

and would mitigate any risk to 

settlement finality due to Participant 

Default. 

DTC believes that the proposed rule 

change to enhance the resiliency of 

DTC’s loss allocation process and to 

shorten the time within which DTC is 

required to return the Actual 

Participants Fund Deposit of a former 

Participant would reduce the risk of 

uncertainty to DTC, its Participants and 

the market overall. 

By replacing the discretionary 

application of DTC retained earnings to 

losses and liabilities with a mandatory 

and defined amount of the Corporate 

Contribution, the proposed rule change 

is designed to provide enhanced 

transparency and accessibility to 

Participants as to how much DTC would 

contribute in the event of a loss or 

liability. The proposed rule change also 

clarifies that the proposed Corporate 

Contribution would apply to both 

Default Loss Events and Declared NonDefault Loss Events. The proposed rule 

change would provide greater 

transparency as to the proposed 

replenishment period for the Corporate 

Contribution, which would allow 

Participants to better assess the 

adequacy of DTC’s loss allocation 

process. Taken together, the proposed 

rule changes with respect to the 

Corporate Contribution would enhance 

the overall resiliency of DTC’s loss 

allocation process by specifying the 

calculation and application of DTC’s 

Corporate Contribution, including the 

proposed replenishment period, and 

would allow Participants to better assess 

the adequacy of DTC’s loss allocation 

process. 

By introducing the concept of an 

Event Period, DTC would be able to 

group Default Loss Events and Declared 

Non-Default Loss Events occurring 

within a period of ten (10) Business 

Days for purposes of allocating losses to 

Participants. DTC believes that the 

Event Period would provide a defined 

structure for the loss allocation process 

to encompass potential sequential 

Default Loss Events or Declared NonDefault Loss Events that may or may not 

be closely linked to an initial event and/ 

or a market dislocation episode. Having 

this structure would enhance the overall 

resiliency of DTC’s loss allocation 

process because the proposed rule 

would expressly address losses that may 

arise from multiple Default Loss Events 

and/or Declared Non-Default Loss 

Events that arise in quick succession. 

Moreover, the proposed Event Period 

structure would provide certainty for 

Participants concerning their maximum 

exposure to mutualized loss allocation 

with respect to such events. 


sradovich on DSK3GMQ082PROD with NOTICES
Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices 38373 

67 12 U.S.C. 5464(b). 

68 Id. 

69 17 CFR 240.17Ad–22(e)(7)(i), (e)(13) and 

(e)(23)(i). 

By introducing the concept of 

‘‘rounds’’ (and accompanying Loss 

Allocation Notices) and applying this 

concept to the timing of loss allocation 

payments and the Participant 

termination process in connection with 

the loss allocation process, DTC would 

(i) set forth a defined amount that it 

would allocate to Participants during 

each round (i.e., the round cap), (ii) 

advise Participants of loss allocation 

obligation information as well as round 

information through the issuance of 

Loss Allocation Notices, and (iii) 

provide Participants with the option to 

limit their loss allocation exposure after 

the issuance of the first Loss Allocation 

Notice in each round. These proposed 

rule changes would enhance the overall 

resiliency of DTC’s loss allocation 

process because they would expressly 

permit DTC to continue the loss 

allocation process in successive rounds 

until all of DTC’s losses are allocated 

and enable DTC to identify continuing 

Participants for purposes of calculating 

subsequent loss allocation obligations in 

successive rounds. Moreover, the 

proposed rule changes would define for 

Participants a clear manner and process 

in which they could cap their loss 

allocation exposure to DTC. 

By reducing the time within which 

DTC is required to return the Actual 

Participants Fund Deposit of a former 

Participant, DTC would enable firms 

that have exited DTC to have access to 

their funds sooner than under current 

Rule 4 while maintaining the protection 

of DTC and its provision of clearance 

and settlement services. DTC would 

continue to be protected under the 

proposed rule change, which will 

maintain the provision that DTC may 

offset the return of funds against the 

amount of any loss or liability of DTC 

arising out of or relating to the 

obligations of the former Participant to 

DTC, and would provide that DTC could 

retain the funds for up to two (2) years. 

As such, DTC would maintain a 

necessary level of coverage for possible 

claims arising in connection with the 

DTC activities of a former Participant. 

Management of Identified Risks 

DTC is proposing the rule changes as 

described in detail above in order to (i) 

provide clarity as to the application of 

the Participants Fund to fund settlement 

when a Participant fails to settle, (ii) 

enhance the resiliency of DTC’s loss 

allocation process, (iii) provide clarity 

and certainty to Participants regarding 

DTC’s loss allocation process, (iv) 

provide clarity with respect to the 

Voluntary Retirement of a Participant. 

Consistency With the Clearing 

Supervision Act 

The proposed rule change would be 

consistent with Section 805(b) of Title 

VIII of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act 

entitled the Payment, Clearing, and 

Settlement Supervision Act of 2010 

(‘‘Clearing Supervision Act’’).67 The 

objectives and principles of Section 

805(b) of the Clearing Supervision Act 

are to promote robust risk management, 

promote safety and soundness, reduce 

systemic risks, and support the stability 

of the broader financial system.68

The proposed rule change would 

provide clarity and certainty around the 

use of the Participants Fund in 

connection with a Participant Default by 

expressly providing for the application 

of the Actual Participants Fund Deposit 

of the defaulting Participant to its 

unpaid obligations, and by providing a 

defined process for pro rata settlement 

charges to non-defaulting Participants 

that is separate from the loss allocation 

process. Together, these proposed rule 

changes more clearly specify the rights 

and obligations of DTC and its 

Participants in respect of the application 

of the Participants Fund. Reducing the 

risk of uncertainty to DTC, its 

Participants, and the market overall 

would promote robust risk management, 

promote safety and soundness, reduce 

systemic risks, and support the stability 

of the broader financial system. 

Therefore, DTC believes that the 

proposed rule changes to provide clarity 

and certainty around the use of the 

Participants Fund in connection with a 

Participant Default, and to provide a 

defined process for pro rata settlement 

charges to the Actual Participants Fund 

Deposits of non-defaulting Participants, 

are consistent with the objectives and 

principles of Section 805(b) of the 

Clearing Supervision Act cited above. 

The proposed rule change would 

enhance the resiliency of DTC’s loss 

allocation process by (1) requiring a 

defined contribution of DTC corporate 

funds to a loss, (2) introducing an Event 

Period, and (3) introducing the concept 

of ‘‘rounds’’ (and accompanying Loss 

Allocation Notices) and applying this 

concept to the timing of loss allocation 

payments and the Participant 

termination process in connection with 

the loss allocation process. Together, 

these proposed rule changes would (i) 

create greater certainty for Participants 

regarding DTC’s obligation towards a 

loss, (ii) more clearly specify DTC’s and 

Participants’ obligations toward a loss 

and balance the need to manage the risk 

of sequential defaults and other 

potential loss events against 

Participants’ need for certainty 

concerning their maximum exposures, 

and (iii) provide Participants the 

opportunity to limit their exposure to 

DTC by capping their exposure to loss 

allocation. Reducing the risk of 

uncertainty to DTC, its Participants and 

the market overall would promote 

robust risk management, promote safety 

and soundness, reduce systemic risks, 

and support the stability of the broader 

financial system. Therefore, DTC 

believes that the proposed rule change 

to enhance the resiliency of DTC’s loss 

allocation process is consistent with the 

objectives and principles of Section 

805(b) of the Clearing Supervision Act 

cited above. 

By reducing the time within which 

DTC is required to return the Actual 

Participants Fund Deposit of a former 

Participant, DTC would enable firms 

that have exited DTC to have access to 

their funds sooner than under current 

Rule 4 while maintaining the protection 

of DTC and its provision of clearance 

and settlement services. DTC would 

continue to be protected under the 

proposed rule change, which will 

maintain the provision that DTC may 

offset the return of funds against the 

amount of any loss or liability of DTC 

arising out of or relating to the 

obligations of the former Participant to 

DTC, and would provide that DTC could 

retain the funds for up to two (2) years. 

As such, DTC would maintain a 

necessary level of coverage for possible 

claims arising in connection with the 

DTC activities of a former Participant. 

Enabling DTC to continue to meet its 

clearance and settlement obligations 

would promote robust risk management, 

promote safety and soundness, reduce 

systemic risks, and support the stability 

of the broader financial system. 

Therefore, DTC believes that this 

proposed rule change is consistent with 

the objectives and principles of Section 

805(b) of the Clearing Supervision Act 

cited above. 

The proposed rule change is also 

consistent with Rules 17Ad–22(e)(7)(i), 

17Ad–22(e)(13), and 17Ad–22 (e)(23)(i), 

promulgated under the Act.69

Rule 17Ad–22(e)(7)(i) under the Act 

requires, in part, that DTC establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to effectively 

measure, monitor, and manage the 

liquidity risk that arises in or is borne 

by DTC, including measuring, 


sradovich on DSK3GMQ082PROD with NOTICES
38374 Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices 

70 Id. at 240.17Ad–22(e)(7)(i). 

71 Id. at 240.17Ad–22(e)(13). 72 Id. at 240.17Ad–22(e)(23)(i). 

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 to effect same-day 

settlement of payment obligations with 

a high degree of confidence under a 

wide range of foreseeable stress 

scenarios.70 By clarifying the remedies 

available to DTC with respect to a 

Participant Default, including the 

application of the Participants Fund as 

a liquidity resource, and by clarifying 

and providing the related processes, the 

proposed rule change is designed so that 

DTC may manage its settlement and 

funding flows on a timely basis and 

apply the Participants Fund as a liquid 

resource in order to effect same day 

settlement of payment obligations with 

a high degree of confidence. Therefore, 

DTC believes that the proposed rule 

changes with respect to the application 

of the Actual Participants Fund Deposits 

of non-defaulting Participants to 

complete settlement are consistent with 

Rule 17Ad–22(e)(7)(i) under the Act. 

Rule 17Ad–22(e)(13) under the Act 

requires, in part, that DTC establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to ensure DTC has 

the authority and operational capacity 

to take timely action to contain losses 

and liquidity demands and continue to 

meet its obligations.71 The proposed 

rule changes to (1) require a defined 

Corporate Contribution to a loss, (2) 

introduce an Event Period, (3) introduce 

the concept of ‘‘rounds’’ (and 

accompanying Loss Allocation Notices) 

and apply this concept to the timing of 

loss allocation payments and the 

Participant termination process in 

connection with the loss allocation 

process, taken together, are designed to 

enhance the resiliency of DTC’s loss 

allocation process. Having a resilient 

loss allocation process would help 

ensure that DTC can effectively and 

timely address losses relating to or 

arising out of Default Loss Events and/ 

or Declared Non-Default Loss Events, 

which in turn would help DTC contain 

losses and continue to conduct its 

clearance and settlement business. In 

addition, by providing clarity as to the 

application of the Participants Fund to 

fund settlement in the event of a 

Participant Default, the proposed rule 

change is designed to clarify that DTC 

is authorized to use the Participants 

Fund to fund settlement. Therefore, 

DTC believes that the proposed rule 

changes to enhance the resiliency of 

DTC’s loss allocation process, and to 

provide clarity as to the application of 

the Participants Fund to fund 

settlement, are consistent with Rule 

17Ad–22(e)(13) under the Act. 

Rule 17Ad–22(e)(23)(i) under the Act 

requires DTC to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

publicly disclose all relevant rules and 

material procedures, including key 

aspects of DTC’s default rules and 

procedures.72 The proposed rule 

changes to (i) separate the provisions for 

the use of the Participants Fund for 

settlement and for loss allocation, (ii) 

make clarifying changes to the 

provisions regarding the application of 

the Participants Fund to complete 

settlement and for the allocation of 

losses, (iii) further align the loss 

allocation rules of the DTCC Clearing 

Agencies, (iv) improve the overall 

transparency and accessibility of the 

provisions in the Rules governing loss 

allocation, and (v) make technical and 

conforming changes, would not only 

ensure that DTC’s loss allocation rules 

are, to the extent practicable and 

appropriate, consistent with the loss 

allocation rules of the other DTCC 

Clearing Agencies, but also would help 

to ensure that DTC’s loss allocation 

rules are transparent and clear to 

Participants. Aligning the loss allocation 

rules of the DTCC Clearing Agencies 

would provide consistent treatment, to 

the extent practicable and appropriate, 

especially for firms that are participants 

of two or more DTCC Clearing Agencies. 

Having transparent and clear loss 

allocation rules would enable 

Participants to better understand the key 

aspects of DTC’s Rules and Procedures 

relating to Participant Default, as well as 

non-default events, and provide 

Participants with increased 

predictability and certainty regarding 

their exposures and obligations. As 

such, DTC believes that the proposed 

rule changes with respect to pro rata 

settlement charges, and to align the loss 

allocation rules across the DTCC 

Clearing Agencies and to improve the 

overall transparency and accessibility of 

DTC’s loss allocation rules are 

consistent with Rule 17Ad-22(e)(23)(i) 

under the Act. 

The proposed rule changes to clarify 

the Voluntary Retirement of a 

Participant would improve the clarity of 

the Rules and help to ensure that DTC’s 

Voluntary Retirement process is 

transparent and clear to Participants. 

Having clear Voluntary Retirement 

provisions would enable Participants to 

better understand the Voluntary 

Retirement process and provide 

Participants with increased 

predictability and certainty regarding 

their rights and obligations with respect 

to such process. As such, DTC believes 

that the proposed rule changes with 

respect to Voluntary Retirement are also 

consistent with Rule 17Ad–22(e)(23)(i) 

under the Act. 

III. Date of Effectiveness of the Advance 

Notice, and Timing for Commission 

Action 

The proposed change may be 

implemented if the Commission does 

not object to the proposed change 

within 60 days of the later of (i) the date 

that the proposed change was filed with 

the Commission or (ii) the date that any 

additional information requested by the 

Commission is received. The clearing 

agency shall not implement the 

proposed change if the Commission has 

any objection to the proposed change. 

A proposed change may be 

implemented in less than 60 days from 

the date the advance notice is filed, or 

the date further information requested 

by the Commission is received, if the 

Commission notifies the clearing agency 

in writing that it does not object to the 

proposed change and authorizes the 

clearing agency to implement the 

proposed change on an earlier date, 

subject to any conditions imposed by 

the Commission. 

The clearing agency shall post notice 

on its website of proposed changes that 

are implemented. 

The proposal shall not take effect 

until all regulatory actions required 

with respect to the proposal are 

completed. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views and 

arguments concerning the foregoing. 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an email to rule-comments@

sec.gov. Please include File Number SR– 

DTC–2017–804 on the subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Secretary, Securities and Exchange 

Commission, 100 F Street NE, 

Washington, DC 20549–1090. 

All submissions should refer to File 

Number SR–DTC–2017–804. 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 


sradovich on DSK3GMQ082PROD with NOTICES
Federal Register / Vol. 83, No. 151 / Monday, August 6, 2018 / Notices 38375 

1 12 U.S.C. 5465(e)(1) and 17 CFR 240.19b– 

4(n)(1)(i), respectively. On December 18, 2017, 

NSCC filed the Advance Notice as a proposed rule 

change (SR–NSCC–2017–018) with the Commission 

pursuant to Section 19(b)(1) of the Act and Rule 

19b–4 thereunder (‘‘Proposed Rule Change’’). (17 

CFR 240.19b–4 and 17 CFR 240.19b–4, 

respectively.) The Proposed Rule Change was 

published in the Federal Register on January 8, 

2018. See Securities Exchange Act Release No. 

82428 (January 2, 2018), 83 FR 897 (January 8, 

2018) (SR–NSCC–2017–018). On February 8, 2018, 

the Commission designated a longer period within 

which to approve, disapprove, or institute 

proceedings to determine whether to approve or 

disapprove the Proposed Rule Change. See 

Securities Exchange Act Release No. 82670 

(February 8, 2018), 83 FR 6626 (February 14, 2018) 

(SR–DTC–2017–022; SR–FICC–2017–022; SR– 

NSCC–2017–018). On March 20, 2018, the 

Commission instituted proceedings to determine 

whether to approve or disapprove the Proposed 

Rule Change. See Securities Exchange Act Release 

No. 82910 (March 20, 2018), 83 FR 12968 (March 

26, 2018) (SR–NSCC–2017–018). On June 25, 2018, 

the Commission designated a longer period for 

Commission action on the proceedings to determine 

whether to approve or disapprove the Proposed 

Rule Change. Therefore, September 5, 2018 is the 

date by which the Commission should either 

approve or disapprove the Proposed Rule Change. 

See Securities Exchange Act Release Nos. 83510 

(June 25, 2018), 83 FR 30791 (June 29, 2018) (SR– 

DTC–2017–022; SR–FICC–2017–022; SR–NSCC– 

2017–018). On June 28, 2018, NSCC filed 

Amendment No. 1 to the Proposed Rule Change. 

See Securities Exchange Act Release No. 83633 

(July 13, 2018), 83 FR 34227 (July 19, 2018) (SR– 

NSCC–2017–018). As of the date of this release, the 

Commission has not received any comments on the 

Proposed Rule Change. 2Securities Exchange Act Release No. 82584 

(January 24, 2018), 83 FR 4377 (January 30, 2018) 

(SR–NSCC–2017–806). Pursuant to Section 

806(e)(1)(H) of the Clearing Supervision Act, the 

Commission may extend the review period of an 

advance notice for an additional 60 days, if the 

changes proposed in the advance notice raise novel 

or complex issues, subject to the Commission 

providing the clearing agency with prompt written 

notice of the extension. 12 U.S.C. 5465(e)(1)(H). The 

Commission found that the Advance Notice raised 

complex issues and, accordingly, extended the 

review period of the Advance Notice for an 

additional 60 days until April 17, 2018, pursuant 

to Section 806(e)(1)(H). Id. 

3 12 U.S.C. 5465(e)(1)(D); See Memorandum from 

the Office of Clearance and Settlement Supervision, 

Division of Trading and Markets, titled 

‘‘Commission’s Request for Additional 

Information,’’ available at https://www.sec.gov/ 

rules/sro/nscc-an.htm. 

4To promote the public availability and 

transparency of its post-notice amendment, NSCC 

submitted a copy of Amendment No. 1 through the 

Commission’s electronic public comment letter 

mechanism. Accordingly, Amendment No. 1 has 

been posted on the Commission’s website at https:// 

www.sec.gov/rules/sro/nscc-an.htm and thus been 

publicly available since June 29, 2018. 12 U.S.C. 

5465(e)(1)(E) and (G); see Memorandum from the 

Office of Clearance and Settlement Supervision, 

Division of Trading and Markets, titled ‘‘Response 

to the Commission’s Request for Additional 

Information,’’ available at https://www.sec.gov/ 

rules/sro/nscc-an.htm. 

5Capitalized terms not defined herein are defined 

in the Rules, available at http://www.dtcc.com/∼/ 

media/Files/Downloads/legal/rules/nscc_rules.pdf. 

only one method. The Commission will 

post all comments on the Commission’s 

internet website (http://www.sec.gov/ 

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the Advance Notice that 

are filed with the Commission, and all 

written communications relating to the 

Advance Notice between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for website viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street NE, 

Washington, DC 20549 on official 

business days between the hours of 

10:00 a.m. and 3:00 p.m. Copies of the 

filing also will be available for 

inspection and copying at the principal 

office of DTC and on DTCC’s website 

(http://dtcc.com/legal/sec-rulefilings.aspx). All comments received 

will be posted without change. Persons 

submitting comments are cautioned that 

we do not redact or edit personal 

identifying information from comment 

submissions. You should submit only 

information that you wish to make 

available publicly. All submissions 

should refer to File Number SR–DTC– 

2017–804 and should be submitted on 

or before August 21, 2018. 

By the Commission. 

Robert W. Errett, 

Deputy Secretary. 

[FR Doc. 2018–16714 Filed 8–3–18; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–83748; File No. SR–NSCC– 

2017–806] 

Self-Regulatory Organizations; 

National Securities Clearing 

Corporation; Notice of Filing of 

Amendment No. 1 to an Advance 

Notice To Amend the Loss Allocation 

Rules and Make Other Changes 

July 31, 2018. 

On December 18, 2017, National 

Securities Clearing Corporation 

(‘‘NSCC’’) filed with the Securities and 

Exchange Commission (‘‘Commission’’) 

advance notice SR–NSCC–2017–806 

(‘‘Advance Notice’’) pursuant to Section 

806(e)(1) of Title VIII of the Dodd-Frank 

Wall Street Reform and Consumer 

Protection Act entitled the Payment, 

Clearing, and Settlement Supervision 

Act of 2010 (‘‘Clearing Supervision 

Act’’) and Rule 19b–4(n)(1)(i) under the 

Securities Exchange Act of 1934 

(‘‘Act’’).1 The notice of filing and 

extension of the review period of the 

Advance Notice was published for 

comment in the Federal Register on 

January 30, 2018.2

On April 10, 2018, the Commission 

required additional information from 

NSCC pursuant to Section 806(e)(1)(D) 

of the Clearing Supervision Act, which 

tolled the Commission’s period of 

review of the Advance Notice.3 On June 

28, 2018, NSCC filed Amendment No. 1 

to the Advance Notice to amend and 

replace in its entirety the Advance 

Notice as originally submitted on 

December 18, 2017, and on July 6, 2018, 

submitted a response to the 

Commission’s request for additional 

information in consideration of the 

Advance Notice, which added a further 

60-days to the review period pursuant to 

Section 806(e)(1)(E) and (G) of the 

Clearing Supervision Act.4

The Advance Notice, as amended by 

Amendment No. 1, is described in Items 

I and II below, which Items have been 

prepared by NSCC. The Commission is 

publishing this notice to solicit 

comments on the Advance Notice, as 

amended by Amendment No. 1, from 

interested persons. 

I. Clearing Agency’s Statement of the 

Terms of Substance of the Advance 

Notice 

This Advance Notice consists of 

proposed modifications to NSCC’s Rules 

and Procedures (‘‘Rules’’) in order to 

amend provisions in the Rules regarding 

loss allocation as well as make other 

changes, as described in greater detail 

below.5

II. Clearing Agency’s Statement of the 

Purpose of, and Statutory Basis for, the 

Advance Notice 

In its filing with the Commission, the 

clearing agency included statements 

concerning the purpose of and basis for 

the Advance Notice and discussed any 

comments it received on the Advance 

Notice. 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 and B below, of the most 

significant aspects of such statements. 

(A) Clearing Agency’s Statement on 

Comments on the Advance Notice 

Received From Members, Participants, 

or Others 

Written comments relating to this 

proposal have not been solicited or 

received. NSCC will notify the 

Commission of any written comments 

received by NSCC. 


sradovich on DSK3GMQ082PROD with NOTICES