Federal Register / Vol. 83, No. 169 / Thursday, August 30, 2018 / Notices 44381 

67 15 U.S.C. 78q–1. 

68 In approving the proposed rule change, the 

Commission considered the proposal’s impact on 

efficiency, competition, and capital formation. 15 

U.S.C. 78c(f). 

69 17 CFR 200.30–3(a)(12). 

1 12 U.S.C. 5465(e)(1). 

2 17 CFR 240.19b–4(n)(1)(i). 

3On December 18, 2017, DTC filed the advance 

notice as proposed rule change SR–DTC–2017–021 

with the Commission pursuant to Section 19(b)(1) 

of the Act and Rule 19b–4 thereunder (‘‘Proposed 

Rule Change’’). 15 U.S.C. 78s(b)(1) and 17 CFR 

240.19b–4, respectively. The Proposed Rule Change 

was published in the Federal Register on January 

8, 2018. Securities Exchange Act Release No. 82432 

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

DTC–2017–021). 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. Securities 

Exchange Act Release No. 82669 (February 8, 2018), 

83 FR 6653 (February 14, 2018) (SR–DTC–2017– 

021, SR–FICC–2017–021, SR–NSCC–2017–017). On 

March 20, 2018, the Commission instituted 

proceedings to determine whether to approve or 

disapprove the Proposed Rule Change. Securities 

Exchange Act Release No. 82912 (March 20, 2018), 

83 FR 12999 (March 26, 2018) (SR–DTC–2017–021). 

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. Securities 

Exchange Act Release No. 83509 (June 25, 2018), 83 

FR 30785 (June 29, 2018) (SR–DTC–2017–021, SR– 

FICC–2017–021, SR–NSCC–2017–017). On June 28, 

2018, DTC filed Amendment No. 1 to the Proposed 

Rule Change. Securities Exchange Act Release No. 

83628 (July 13, 2018), 83 FR 34263 (July 19, 2018) 

(SR–DTC–2017–021). DTC submitted a courtesy 

copy of Amendment No. 1 to the Proposed Rule 

Change through the Commission’s electronic public 

comment letter mechanism. Accordingly, 

Amendment No. 1 to the Proposed Rule Change has 

been publicly available on the Commission’s 

website at https://www.sec.gov/rules/sro/dtc.htm 

since June 29, 2018. The Commission did not 

receive any comments. The proposal, as set forth in 

both the advance notice and the Proposed Rule 

Change, each as modified by Amendments No. 1, 

shall not take effect until all required regulatory 

actions are completed. 

4Securities Exchange Act Release No. 82579 

(January 24, 2018), 83 FR 4310 (January 30, 2018) 

(SR–DTC–2017–803) (‘‘Notice’’). 

5Pursuant 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 novel and complex issues 

and, accordingly, extended the review period of the 

advance notice for an additional 60 days until April 

17, 2018. See Notice, supra note 4. 

6 12 U.S.C. 5465(e)(1)(D). 

7See 12 U.S.C. 5465(e)(1)(E)(ii) and (G)(ii); 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. 

8Securities Exchange Act Release No. 83743 (July 

31, 2018), 83 FR 38344 (August 6, 2018) (SR–DTC– 

2017–803). DTC submitted a courtesy copy of 

Amendment No. 1 to the advance notice through 

the Commission’s electronic public comment letter 

mechanism. Accordingly, Amendment No. 1 to the 

advance notice has been publicly available on the 

Commission’s website at http://www.sec.gov/rules/ 

sro/dtc-an.shtml since June 29, 2018. 

9 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. 

10Capitalized terms used herein and not 

otherwise defined herein are defined in the Rules. 

Therefore, the Commission finds that 

the proposal is designed to be efficient 

and effective in meeting the 

requirements of Participants and 

Pledgees, consistent with Rule 17Ad– 

22(e)(21) under the Act. 

III. Conclusion 

On the basis of the foregoing, the 

Commission finds that the proposal is 

consistent with the requirements of the 

Act, in particular the requirements of 

Section 17A of the Act 67 and the rules 

and regulations thereunder. 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act, that 

proposed rule change SR–DTC–2018– 

006 be, and hereby is, approved.68

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.69

Eduardo A. Aleman, 

Assistant Secretary. 

[FR Doc. 2018–18784 Filed 8–29–18; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–83953; File No. SR–DTC– 

2017–803] 

Self-Regulatory Organizations; The 

Depository Trust Company; Notice of 

No Objection to an Advance Notice, as 

Modified by Amendment No. 1, To 

Adopt a Recovery & Wind-Down Plan 

and Related Rules 

August 27, 2018. 

On December 18, 2017, The 

Depository Trust Company (‘‘DTC’’) 

filed with the Securities and Exchange 

Commission (‘‘Commission’’) advance 

notice SR–DTC–2017–803 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’’) 1 and Rule 19b– 

4(n)(1)(i) under the Securities Exchange 

Act of 1934 (‘‘Act’’) 2 to adopt a recovery 

and wind-down plan (‘‘R&W Plan’’) and 

related rules.3 The advance notice was 

published for comment in the Federal 

Register on January 30, 2018.4 In that 

publication, the Commission also 

extended the review period of the 

advance notice for an additional 60 

days, pursuant to Section 806(e)(1)(H) of 

the Clearing Supervision Act.5 On April 

10, 2018, the Commission required 

additional information from DTC 

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

Clearing Supervision Act,6 which tolled 

the Commission’s period of review of 

the advance notice until 60 days from 

the date the information required by the 

Commission was received by the 

Commission.7 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 

filed on December 18, 2017.8 On July 6, 

2018, the Commission received a 

response to its request for additional 

information in consideration of the 

advance notice, which, in turn, added a 

further 60-days to the review period 

pursuant to Section 806(e)(1)(E) and (G) 

of the Clearing Supervision Act.9 The 

Commission did not receive any 

comments. This publication serves as 

notice that the Commission does not 

object to the proposed changes set forth 

in the advance notice, as modified by 

Amendment No. 1 (hereinafter, 

‘‘Advance Notice’’). 

I. Description of the Advance Notice 

In the Advance Notice, DTC proposes 

to (1) adopt an R&W Plan; and (2) 

amend the Rules, By-Laws and 

Organization Certificate of DTC 

(‘‘Rules’’) 10 to adopt Rule 32(A) (Winddown of the Corporation) and Rule 38 

(Market Disruption and Force Majeure) 

(each proposed Rule 32(A) and 

proposed Rule 38, a ‘‘Proposed Rule’’ 

and, collectively, the ‘‘Proposed 

Rules’’). 

DTC states that the R&W Plan would 

be used by the Board of Directors of 

DTC (‘‘Board’’) and DTC’s management 

in the event DTC encounters scenarios 

that could potentially prevent it from 

being able to provide its critical services 

as a going concern. 

DTC states that the Proposed Rules 

are designed to (1) facilitate the 

implementation of the R&W Plan when 

necessary and, in particular, allow DTC 

to effectuate its strategy for winding 

down and transferring its business; (2) 

provide Participants with transparency 

around critical provisions of the R&W 

Plan that relate to their rights, 

responsibilities and obligations; and (3) 

provide DTC with the legal basis to 

implement those provisions of the R&W 

Plan when necessary. 

A. DTC R&W Plan 

The R&W Plan would be structured to 

provide a roadmap, define the strategy, 

and identify the tools available to DTC 

to either (i) recover, in the event it 


amozie on DSK3GDR082PROD with NOTICES1
44382 Federal Register / Vol. 83, No. 169 / Thursday, August 30, 2018 / Notices 

11 DTCC is a user-owned and user-governed 

holding company and is the parent company of 

DTC and its affiliates, National Securities Clearing 

Corporation (‘‘NSCC’’) and Fixed Income Clearing 

Corporation (‘‘FICC,’’ and, together with NSCC and 

DTC, the ‘‘Clearing Agencies’’). The R&W Plan 

would describe how corporate support services are 

provided to DTC from DTCC and DTCC’s other 

subsidiaries through intercompany agreements 

under a shared services model. 

12 DTC states that it uses the term ‘‘credit/market’’ 

risks in the R&W Plan because, for DTC, credit risk 

and market risk are closely related. See infra note 

23. 

13See Securities Exchange Act Release No. 81105 

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

DTC–2017–003, SR–FICC–2017–007, SR–NSCC– 

2017–004). 14See id. 15See supra note 10. 

16 DTCC operates on a shared services model with 

respect to DTC and its other subsidiaries. Most 

corporate functions are established and managed on 

an enterprise-wide basis pursuant to intercompany 

agreements under which it is generally DTCC that 

provides a relevant service to a subsidiary, 

including DTC. 

experiences losses that exceed its 

prefunded resources (such strategies 

and tools referred to herein as the 

‘‘Recovery Plan’’) or (ii) wind-down its 

business in a manner designed to permit 

the continuation of its critical services 

in the event that such recovery efforts 

are not successful (such strategies and 

tools referred to herein as the ‘‘Winddown Plan’’). 

The R&W Plan would identify (i) the 

recovery tools available to DTC to 

address the risks of (a) uncovered losses 

or liquidity shortfalls resulting from the 

default of one or more of its 

Participants, and (b) losses arising from 

non-default events, such as damage to 

its physical assets, a cyber-attack, or 

custody and investment losses, and (ii) 

the strategy for implementation of such 

tools. The R&W Plan would also 

establish the strategy and framework for 

the orderly wind-down of DTC and the 

transfer of its business in the remote 

event the implementation of the 

available recovery tools does not 

successfully return DTC to financial 

viability. 

As discussed in greater detail below, 

the R&W Plan would provide, among 

other matters, (i) an overview of the 

business of DTC and its parent, The 

Depository Trust & Clearing Corporation 

(‘‘DTCC’’); 11 (ii) an analysis of DTC’s 

intercompany arrangements and critical 

links to other financial market 

infrastructure (‘‘FMI’’); (iii) a 

description of DTC’s services, and the 

criteria used to determine which 

services are considered critical; (iv) a 

description of the DTC and DTCC 

governance structure; (v) a description 

of the governance around the overall 

recovery and wind-down program; (vi) a 

discussion of tools available to DTC to 

mitigate credit/market 12 risks and 

liquidity risks, including recovery 

indicators and triggers, and the 

governance around management of a 

stress event along a Crisis Continuum 

timeline; (vii) a discussion of potential 

non-default losses and the resources 

available to DTC to address such losses, 

including recovery triggers and tools to 

mitigate such losses; (viii) an analysis of 

the recovery tools’ characteristics, 

including how they are designed to be 

comprehensive, effective, and 

transparent, how the tools provide 

incentives to Participants to, among 

other things, control and monitor the 

risks they may present to DTC, and how 

DTC seeks to minimize the negative 

consequences of executing its recovery 

tools; and (ix) the framework and 

approach for the orderly wind-down 

and transfer of DTC’s business, 

including an estimate of the time and 

costs to effect a recovery or orderly 

wind-down of DTC. 

Certain recovery tools that would be 

identified in the R&W Plan are based in 

the Rules (including the Proposed 

Rules); therefore, descriptions of those 

tools in the R&W Plan would include 

descriptions of, and reference to, the 

applicable Rules and any related 

internal policies and procedures. Other 

recovery tools that would be identified 

in the R&W Plan are based in 

contractual arrangements to which DTC 

is a party, including, for example, 

existing committed or pre-arranged 

liquidity arrangements. Further, the 

R&W Plan would state that DTC may 

develop further supporting internal 

guidelines and materials that may 

provide operational support for matters 

described in the R&W Plan, and that 

such documents would be supplemental 

and subordinate to the R&W Plan. 

DTC states that many of the tools 

available to DTC that would be 

described in the R&W Plan are DTC’s 

existing, business-as-usual risk 

management and default management 

tools, which would continue to be 

applied in scenarios of increasing stress. 

In addition to these existing, businessas-usual tools, the R&W Plan would 

describe DTC’s other principal recovery 

tools, which include, for example, (i) 

identifying, monitoring and managing 

general business risk and holding 

sufficient liquid net assets funded by 

equity (‘‘LNA’’) to cover potential 

general business losses pursuant to the 

Clearing Agency Policy on Capital 

Requirements (‘‘Capital Policy’’),13 (ii) 

maintaining the Clearing Agency Capital 

Replenishment Plan (‘‘Replenishment 

Plan’’) as a viable plan for the 

replenishment of capital should DTC’s 

equity fall close to or below the amount 

being held pursuant to the Capital 

Policy,14 and (iii) the process for the 

allocation of losses among Participants 

as provided in Rule 4 (Participants Fund 

and Participants Investment).15 The 

R&W Plan would provide governance 

around the selection and 

implementation of the recovery tool or 

tools most relevant to mitigate a stress 

scenario and any applicable loss or 

liquidity shortfall. 

The development of the R&W Plan is 

facilitated by the Office of Recovery & 

Resolution Planning (‘‘R&R Team’’) of 

DTCC.16 The R&R Team reports to the 

DTCC Management Committee 

(‘‘Management Committee’’) and is 

responsible for maintaining the R&W 

Plan and for the development and 

ongoing maintenance of the overall 

recovery and wind-down planning 

process. The Board, or such committees 

as may be delegated authority by the 

Board from time to time pursuant to its 

charter, would review and approve the 

R&W Plan biennially, and would also 

review and approve any changes that 

are proposed to the R&W Plan outside 

of the biennial review. 

As discussed in greater detail below, 

the Proposed Rules would define the 

procedures that may be employed in the 

event of a DTC wind-down, and would 

provide for DTC’s authority to take 

certain actions on the occurrence of a 

Market Disruption Event, as defined 

therein. DTC states that the Proposed 

Rules are designed to provide 

Participants with transparency and 

certainty with respect to these matters. 

DTC also states that the Proposed Rules 

are designed to facilitate the 

implementation of the R&W Plan, 

particularly DTC’s strategy for winding 

down and transferring its business, and 

are designed to provide DTC with the 

legal basis to implement those aspects of 

the R&W Plan. 

1. Business Overview, Critical Services, 

and Governance 

The introduction to the R&W Plan 

would identify the document’s purpose 

and its regulatory background, and 

would outline a summary of the R&W 

Plan. The stated purpose of the R&W 

Plan is that it is to be used by the Board 

and DTC management in the event DTC 

encounters scenarios that could 

potentially prevent it from being able to 

provide its critical services as a going 

concern. 

The R&W Plan would describe 

DTCC’s business profile, provide a 

summary of DTC’s services, and identify 

the intercompany arrangements and 

critical links between DTC and other 


amozie on DSK3GDR082PROD with NOTICES1
Federal Register / Vol. 83, No. 169 / Thursday, August 30, 2018 / Notices 44383 

17The DTCC, DTC, NSCC, FICC Risk Committee 

Charter is available at http://www.dtcc.com/∼/ 

media/Files/Downloads/legal/policy-andcompliance/DTCC-BOD-Risk-CommitteeCharter.pdf. 

18The R&W Plan would state that these groups 

would be involved to address how to mitigate the 

financial impact of non-default losses, and in 

recommending mitigating actions, the Management 

Committee would consider information and 

recommendations from relevant subject matter 

experts based on the nature and circumstances of 

the non-default event. Any necessary operational 

response to these events, however, would be 

managed in accordance with applicable incident 

response/business continuity process. 

FMIs. DTC states that the overview 

section would provide a context for the 

R&W Plan by describing DTC’s business, 

organizational structure and critical 

links to other entities. DTC also states 

that by providing this context, this 

section would facilitate the analysis of 

the potential impact of utilizing the 

recovery tools set forth in later sections 

of the Recovery Plan, and the analysis 

of the factors that would be addressed 

in implementing the Wind-down Plan. 

The R&W Plan would provide a 

description of established links between 

DTC and other FMIs, both domestic and 

foreign, including central securities 

depositories (‘‘CSDs’’) and central 

counterparties (‘‘CCPs’’), as well as the 

twelve U.S. Federal Reserve Banks. DTC 

states that this section of the R&W Plan, 

which identifies and briefly describes 

DTC’s established links, is designed to 

provide a mapping of critical 

connections and dependencies that may 

need to be relied on or otherwise 

addressed in connection with the 

implementation of either the Recovery 

Plan or the Wind-down Plan. 

The R&W Plan would define the 

criteria for classifying certain of DTC’s 

services as ‘‘critical,’’ and would 

identify those critical services and the 

rationale for their classification. This 

section of the R&W Plan would provide 

an analysis of the potential systemic 

impact from a service disruption, which 

DTC states is important for evaluating 

how the recovery tools and the winddown strategy would facilitate and 

provide for the continuation of DTC’s 

critical services to the markets it serves. 

The criteria that would be used to 

identify a DTC service or function as 

critical would include (1) whether there 

is a lack of alternative providers or 

products; (2) whether failure of the 

service could impact DTC’s ability to 

perform its book-entry and settlement 

services; (3) whether failure of the 

service could impact DTC’s ability to 

perform its payment system functions; 

and (4) whether the service is 

interconnected with other participants 

and processes within the U.S. financial 

system, for example, with other FMIs, 

settlement banks and broker-dealers. 

The R&W Plan would then list each of 

those services, functions or activities 

that DTC has identified as ‘‘critical’’ 

based on the applicability of these four 

criteria. The R&W Plan would also 

include a non-exhaustive list of DTC 

services that are not deemed critical. 

DTC states that the evaluation of 

which services provided by DTC are 

deemed critical is important for 

purposes of determining how the R&W 

Plan would facilitate the continuity of 

those services. While DTC’s Wind-down 

Plan would provide for the transfer of 

all critical services to a transferee in the 

event DTC’s wind-down is 

implemented, it would anticipate that 

any non-critical services that are 

ancillary and beneficial to a critical 

service, or that otherwise have 

substantial user demand from the 

continuing membership, would also be 

transferred. 

The R&W Plan would describe the 

governance structure of both DTCC and 

DTC. This section of the R&W Plan 

would identify the ownership and 

governance model of these entities at 

both the Board and management levels. 

The R&W Plan would state that the 

stages of escalation required to manage 

recovery under the Recovery Plan or to 

invoke DTC’s wind-down under the 

Wind-down Plan would range from 

relevant business line managers up to 

the Board through DTC’s governance 

structure. The R&W Plan would then 

identify the parties responsible for 

certain activities under both the 

Recovery Plan and the Wind-down Plan, 

and would describe their respective 

roles. The R&W Plan would identify the 

Risk Committee of the Board (‘‘Board 

Risk Committee’’) as being responsible 

for oversight of risk management 

activities at DTC, which include 

focusing on both oversight of risk 

management systems and processes 

designed to identify and manage various 

risks faced by DTC as well as oversight 

of DTC’s efforts to mitigate systemic 

risks that could impact those markets 

and the broader financial system.17 The 

R&W Plan would identify the DTCC 

Management Risk Committee 

(‘‘Management Risk Committee’’) as 

primarily responsible for general, dayto-day risk management through 

delegated authority from the Board Risk 

Committee. The R&W Plan would state 

that the Management Risk Committee 

has delegated specific day-to-day risk 

management, including management of 

risks addressed through margining 

systems and related activities, to the 

DTCC Group Chief Risk Office 

(‘‘GCRO’’), which works with staff 

within the DTCC Financial Risk 

Management group. Finally, the R&W 

Plan would describe the role of the 

Management Committee, which 

provides overall direction for all aspects 

of DTC’s business, technology, and 

operations and the functional areas that 

support these activities. 

The R&W Plan would describe the 

governance of recovery efforts in 

response to both default losses and nondefault losses under the Recovery Plan, 

identifying the groups responsible for 

those recovery efforts. Specifically, the 

R&W Plan would state that the 

Management Risk Committee provides 

oversight of actions relating to the 

default of a Participant, which would be 

reported and escalated to it through the 

GCRO, and the Management Committee 

provides oversight of actions relating to 

non-default events that could result in 

a loss, which would be reported and 

escalated to it from the DTCC Chief 

Financial Officer (‘‘CFO’’) and the DTCC 

Treasury group that reports to the CFO, 

and from other relevant subject matter 

experts based on the nature and 

circumstances of the non-default 

event.18 More generally, the R&W Plan 

would state that the type of loss and the 

nature and circumstances of the events 

that lead to the loss would dictate the 

components of governance to address 

that loss, including the escalation path 

to authorize those actions. Both the 

Recovery Plan and the Wind-down Plan 

would describe the governance of 

escalations, decisions, and actions 

under each of those plans. 

Finally, the R&W Plan would describe 

the role of the R&R Team in managing 

the overall recovery and wind-down 

program and plans for each of the 

Clearing Agencies. 

2. DTC Recovery Plan 

DTC states that the Recovery Plan is 

intended to be a roadmap of those 

actions that DTC may employ to 

monitor and, as needed, stabilize its 

financial condition. DTC also states that 

as each event that could lead to a 

financial loss could be unique in its 

circumstances, DTC proposes that the 

Recovery Plan would not be prescriptive 

and would permit DTC to maintain 

flexibility in its use of identified tools 

and in the sequence in which such tools 

are used, subject to any conditions in 

the Rules or the contractual arrangement 

on which such tool is based. DTC’s 

Recovery Plan would consist of (1) a 

description of the risk management 

surveillance, tools, and governance that 

DTC would employ across evolving 

stress scenarios that it may face as it 

transitions through a Crisis Continuum, 

described below; (2) a description of 


amozie on DSK3GDR082PROD with NOTICES1
44384 Federal Register / Vol. 83, No. 169 / Thursday, August 30, 2018 / Notices 

19The R&W Plan would define an ‘‘Affiliated 

Family’’ of Participants as a number of affiliated 

entities that are all Participants of DTC. 

20See Rule 4 (Participants Fund and Participants 

Investment), Rule 9(A) (Transactions in Securities 

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

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

Securities), Rule 10 (Discretionary Termination), 

Rule 11 (Mandatory Termination) and Rule 12 

(Insolvency), supra note 10. Further, the term 

‘‘Participant Default’’ would also be used in the 

R&W Plan as such term is defined in Rule 4 

(Participants Fund and Participants Investment), 

see supra note 10. 

21 DTC’s liquidity risk management strategy, 

including the manner in which DTC would deploy 

liquidity tools as well as its intraday use of 

liquidity, is described in the Clearing Agency 

Liquidity Risk Management Framework. See 

Securities Exchange Act Release No. 82377 

(December 21, 2017), 82 FR 61617 (December 28, 

2017) (SR–DTC–2017–004, SR–FICC–2017–008, 

SR–NSCC–2017–005). 

22See Rule 4 (Participants Fund and Participants 

Investment), supra note 10. 

23See Rule 1 (Definitions; Governing Law), 

Section 1, supra note 10. DTC states that credit risk 

and market risk are closely related for DTC, because 

DTC monitors credit exposures from Participants 

through these risk management controls, which 

limit Participant settlement obligations to the 

amount of available liquidity resources and require 

those obligations to be fully collateralized. The 

pledge or liquidation of collateral in an amount 

sufficient to restore liquidity resources depends on 

market values and demand, i.e., market risk 

exposure. DTC states that such risk management 

controls are part of DTC’s market risk management 

strategy and are designed to comply with Rule 

17Ad–22(e)(4) under the Act, where these risks are 

referred to as ‘‘credit risks.’’ See 17 CFR 240.17Ad– 

22(e)(4). 

24 Id. 

25 DTC’s stress testing practices are described in 

the Clearing Agency Stress Testing Framework 

(Market Risk). See Securities Exchange Act Release 

No. 82638 (December 19, 2017), 82 FR 61082 

(December 26, 2017) (SR–DTC–2017–005, SR– 

FICC–2017–009, SR–NSCC–2017–006). 

DTC’s risk of losses that may result from 

non-default events, and the financial 

resources and recovery tools available to 

DTC to manage those risks and any 

resulting losses; and (3) an evaluation of 

the characteristics of the recovery tools 

that may be used in response to either 

losses arising out of a Participant 

Default (as defined below) or nondefault losses. In all cases, DTC states 

that it would act in accordance with the 

Rules, within the governance structure 

described in the R&W Plan, and in 

accordance with applicable regulatory 

oversight to address each situation to 

best protect DTC, its Participants and 

the markets in which it operates. 

(i) Managing Participant Default Losses 

and Liquidity Needs Through the Crisis 

Continuum 

The Recovery Plan would describe the 

risk management surveillance, tools, 

and governance that DTC may employ 

across an increasing stress environment, 

which is referred to as the Crisis 

Continuum. This description would 

identify those tools that can be 

employed to mitigate losses, and 

mitigate or minimize liquidity needs, as 

the market environment becomes 

increasingly stressed. The phases of the 

Crisis Continuum would include (1) a 

stable market phase, (2) a stress market 

phase, (3) a phase commencing with 

DTC’s decision to cease to act for a 

Participant or Affiliated Family of 

Participants 19 (referred to in the R&W 

Plan as the ‘‘Participant Default phase’’), 

and (4) a recovery phase. In the R&W 

Plan, the term ‘‘cease to act’’ and the 

actions that may lead to such decision 

are used within the context of the 

Rules.20 The R&W Plan would, for 

purposes of the R&W Plan, use the term 

‘‘Participant Default Losses’’ to refer to 

losses that arise out of or relate to the 

Participant Default and resulting cease 

to act (including any losses that arise 

from liquidation of the Participant’s 

Collateral). 

DTC states that the Recovery Plan 

would provide context to its roadmap 

through this Crisis Continuum by 

describing DTC’s ongoing management 

of credit, market, and liquidity risk, and 

its existing process for measuring and 

reporting its risks as they align with 

established thresholds for its tolerance 

of those risks. DTC also states that the 

Recovery Plan would discuss the 

management of credit/market risk and 

liquidity exposures together because the 

tools that address these risks can be 

deployed either separately or in a 

coordinated approach in order to 

address both exposures. DTC states that 

it manages these risk exposures 

collectively to limit their overall impact 

on DTC and its Participants. DTC states 

that it has built-in mechanisms to limit 

exposures and replenish financial 

resources used in a stress event, in order 

to continue to operate in a safe and 

sound manner. DTC states that it is a 

closed, collateralized system in which 

liquidity resources are matched against 

risk management controls, so, at any 

time, the potential net settlement 

obligation of the Participant or 

Affiliated Family of Participants with 

the largest net settlement obligation 

cannot exceed the amount of liquidity 

resources.21 DTC states that while 

Collateral securities are subject to 

market price risk, DTC manages its 

liquidity and market risks through the 

calculation of the required deposits to 

the Participants Fund 22 and risk 

management controls, i.e., collateral 

haircuts, the Collateral Monitor 23 and 

Net Debit Cap.24

The Recovery Plan would outline the 

metrics and indicators that DTC has 

developed to evaluate a stress situation 

against established risk tolerance 

thresholds. Each risk mitigation tool 

identified in the Recovery Plan would 

include a description of the escalation 

thresholds that allow for effective and 

timely reporting to the appropriate 

internal management staff and 

committees, or to the Board. DTC states 

that the Recovery Plan is designed to 

make clear that these tools and 

escalation protocols would be calibrated 

across each phase of the Crisis 

Continuum. The Recovery Plan would 

also establish that DTC would retain the 

flexibility to deploy such tools either 

separately or in a coordinated approach, 

and to use other alternatives to these 

actions and tools as necessitated by the 

circumstances of a particular Participant 

Default event, in accordance with the 

Rules. Therefore, DTC states that the 

Recovery Plan would both provide DTC 

with a roadmap to follow within each 

phase of the Crisis Continuum, and 

would permit it to adjust its risk 

management measures to address the 

unique circumstances of each event. 

The Recovery Plan would describe the 

conditions that mark each phase of the 

Crisis Continuum, and would identify 

actions that DTC could take as it 

transitions through each phase in order 

to both prevent losses from 

materializing through active risk 

management, and to restore the 

financial health of DTC during a period 

of stress. 

The stable market phase of the Crisis 

Continuum would describe active risk 

management activities in the normal 

course of business. These activities 

would include performing (1) backtests 

to evaluate the adequacy of the 

collateral level and the haircut 

sufficiency for covering market price 

volatility and (2) stress testing to cover 

market price moves under real historical 

and hypothetical scenarios to assess the 

haircut adequacy under extreme but 

plausible market conditions. The 

backtesting and stress testing results are 

escalated, as necessary, to internal and 

Board committees.25

The Recovery Plan would describe 

some of the indicators of the stress 

market phase of the Crisis Continuum, 

which would include, for example, 

volatility in market prices of certain 

assets where there is increased 

uncertainty among market participants 

about the fundamental value of those 

assets. This phase would involve 

general market stresses, when no 

Participant Default would be imminent. 

Within the description of this phase, the 

Recovery Plan would provide that DTC 

may take targeted, routine risk 


amozie on DSK3GDR082PROD with NOTICES1
Federal Register / Vol. 83, No. 169 / Thursday, August 30, 2018 / Notices 44385 

26See Rule 10 (Discretionary Termination); Rule 

11 (Mandatory Termination); Rule 12 (Insolvency), 

supra note 10. 

27See supra note 10. Rule 4 (Participants Fund 

and Participants Investment) defines the amount 

DTC would contribute to address a loss resulting 

from either a Participant Default or a non-default 

event as the Corporate Contribution. This amount 

is 50 percent of the General Business Risk Capital 

Requirement, which is calculated pursuant to the 

Capital Policy and, which DTC states is an amount 

sufficient to cover potential general business losses 

so that DTC can continue operations and services 

as a going concern if those losses materialize, in an 

effort to comply with Rule 17Ad–22(e)(15) under 

the Act. See supra note 13 (concerning the Capital 

Policy); 17 CFR 240.17Ad–22(e)(15). 

28As provided for in Rule 4 (Participants Fund 

and Participants Investment), the ‘‘Event Period’’ is 

ten Business Days beginning on (i) with respect to 

a Participant Default, the day on which DTC 

notifies Participants that it has ceased to act for a 

Participant, or (ii) with respect to a non-default loss, 

the day that DTC notifies Participants of the 

determination by the Board that there is a nondefault loss event. Rule 4 (Participants Fund and 

Participants Investment) defines a ‘‘round’’ as a 

series of loss allocations relating to an Event Period, 

and provides that the first Loss Allocation Notice 

in a first, second, or subsequent round shall 

expressly state that such notice reflects the 

beginning of a first, second, or subsequent round. 

The maximum allocable loss amount of a round is 

equal to the sum of the Loss Allocation Caps of 

those Participants included in the round. See Rule 

4 (Participants Fund and Participants Investment), 

supra note 10. 

29The Corridor Actions that would be identified 

in the R&W Plan are designed to be indicative, but 

not prescriptive; therefore, if DTC needs to consider 

alternative actions due to the applicable facts and 

circumstances, the escalation of those alternative 

actions would follow the same escalation protocol 

identified in the R&W Plan for the Corridor 

Indicator to which the action relates. 30See supra note 10. 

management measures as necessary and 

as permitted by the Rules. 

Within the Participant Default phase 

of the Crisis Continuum, the Recovery 

Plan would provide a roadmap for the 

existing procedures that DTC would 

follow in the event of a Participant 

Default and any decision by DTC to 

cease to act for that Participant.26 The 

Recovery Plan would provide that the 

objectives of DTC’s actions upon a 

Participant Default are to (1) minimize 

losses and market exposure, and (2), to 

the extent practicable, minimize 

disturbances to the affected markets. 

The Recovery Plan would describe 

tools, actions, and related governance 

for both market risk monitoring and 

liquidity risk monitoring through this 

phase. Management of liquidity risk 

through this phase would involve 

ongoing monitoring of, among other 

things, the adequacy of the Participants 

Fund and risk controls, and the 

Recovery Plan would identify certain 

actions DTC may deploy as it deems 

necessary to mitigate a potential 

liquidity shortfall. The Recovery Plan 

would state that, throughout this phase, 

relevant information would be escalated 

and reported to both internal 

management committees and the Board 

Risk Committee. 

The Recovery Plan would also 

identify financial resources available to 

DTC, pursuant to the Rules, to address 

losses arising out of a Participant 

Default. Specifically, Rule 4 

(Participants Fund and Participants 

Investment) provides that losses 

remaining after application of the 

Defaulting Participant’s resources be 

satisfied first by applying a Corporate 

Contribution, and then, if necessary, by 

allocating remaining losses among the 

membership in accordance with Rule 4 

(Participants Fund and Participants 

Investment).27

In order to provide for an effective 

and timely recovery, the Recovery Plan 

would describe the period of time that 

would occur near the end of the 

Participant Default phase, during which 

DTC may experience stress events or 

observe early warning indicators that 

allow it to evaluate its options and 

prepare for the recovery phase (referred 

to in the R&W Plan as the Recovery 

Corridor). The Recovery Plan would 

then describe the recovery phase of the 

Crisis Continuum, which would begin 

on the date that DTC issues the first 

Loss Allocation Notice of the second 

loss allocation round with respect to a 

given Event Period.28 The recovery 

phase would describe actions that DTC 

may take to avoid entering into a winddown of its business. 

DTC states that it expects that 

significant deterioration of liquidity 

resources would cause it to enter the 

Recovery Corridor. Therefore, the R&W 

Plan would describe the actions DTC 

may take aimed at replenishing those 

resources. Throughout the Recovery 

Corridor, DTC would monitor the 

adequacy of its resources and the 

expected timing of replenishment of 

those resources, and would do so 

through the monitoring of certain 

corridor indicator metrics. 

DTC states that the majority of the 

corridor indicators, as identified in the 

Recovery Plan, relate directly to 

conditions that may require DTC to 

adjust its strategy for hedging and 

liquidating Collateral securities, and any 

such changes would include an 

assessment of the status of the corridor 

indicators. For each corridor indicator, 

the Recovery Plan would identify (1) 

measures of the indicator, (2) 

evaluations of the status of the 

indicator, (3) metrics for determining 

the status of the deterioration or 

improvement of the indicator, and (4) 

Corridor Actions, which are steps that 

may be taken to improve the status of 

the indicator,29 as well as management 

escalations required to authorize those 

steps. DTC states that because DTC has 

never experienced the default of 

multiple Participants, it has not, 

historically, measured the deterioration 

or improvements metrics of the corridor 

indicators. Therefore, DTC states that 

these metrics were chosen based on the 

business judgment of DTC management. 

The Recovery Plan would also 

describe the reporting and escalation of 

the status of the corridor indicators 

throughout the Recovery Corridor. 

Significant deterioration of a corridor 

indicator, as measured by the metrics 

set out in the Recovery Plan, would be 

escalated to the Board. DTC 

management would review the corridor 

indicators and the related metrics at 

least annually, and would modify these 

metrics as necessary in light of 

observations from simulations of 

Participant Defaults and other analyses. 

Any proposed modifications would be 

reviewed by the Management Risk 

Committee and the Board Risk 

Committee. The Recovery Plan would 

estimate that DTC may remain in the 

Recovery Corridor stage between one 

day and two weeks. DTC states that this 

estimate is based on historical data 

observed in past Participant Default 

events, the results of simulations of 

Participant Defaults, and periodic 

liquidity analyses conducted by DTC. 

DTC states that the actual length of a 

Recovery Corridor would vary based on 

actual market conditions observed at the 

time, and DTC would expect the 

Recovery Corridor to be shorter in 

market conditions of increased stress. 

The Recovery Plan would outline 

steps by which DTC may allocate its 

losses, which would occur when and in 

the order provided in Rule 4 

(Participants Fund and Participants 

Investment).30 The Recovery Plan 

would also identify tools that may be 

used to address foreseeable shortfalls of 

DTC’s liquidity resources following a 

Participant Default, and would provide 

that these tools may be used as 

appropriate during the Crisis 

Continuum to address liquidity 

shortfalls if they arise. DTC states that 

the goal in managing DTC’s liquidity 

resources is to maximize resource 

availability in an evolving stress 

situation, to maintain flexibility in the 

order and use of sources of liquidity, 

and to repay any third party lenders in 

a timely manner. DTC states that the 

Recovery Plan would state that the 

availability and capacity of these 

liquidity tools cannot be accurately 

predicted and are dependent on the 

circumstances of the applicable stress 


amozie on DSK3GDR082PROD with NOTICES1
44386 Federal Register / Vol. 83, No. 169 / Thursday, August 30, 2018 / Notices 

31 DTC states that the ‘‘three lines of defense’’ 

approach to risk management includes (1) a first 

line of defense comprised of the various business 

lines and functional units that support the products 

and services offered by DTC; (2) a second line of 

defense comprised of control functions that support 

DTC, including the risk management, legal and 

compliance areas; and (3) a third line of defense, 

which is performed by an internal audit group. The 

Clearing Agency Risk Management Framework 

includes a description of this ‘‘three lines of 

defense’’ approach to risk management, and 

addresses how DTC comprehensively manages 

various risks, including operational, general 

business, investment, custody, and other risks that 

arise in or are borne by it. Securities Exchange Act 

Release No. 81635 (September 15, 2017), 82 FR 

44224 (September 21, 2017) (SR–DTC–2017–013, 

SR–FICC–2017–016, SR–NSCC–2017–012). The 

Clearing Agency Operational Risk Management 

Framework describes the manner in which DTC 

manages operational risks, as defined therein. 

Securities Exchange Act Release No. 81745 

(September 28, 2017), 82 FR 46332 (October 4, 

2017) (SR–DTC–2017–014, SR–FICC–2017–017, 

SR–NSCC–2017–013). 

32See supra note 27. 

33See supra note 27. 

34See supra note 10. 

35See supra note 13 (concerning the Capital 

Policy). 

36See supra note 10. 

period, including market price 

volatility, actual or perceived 

disruptions in financial markets, the 

costs to DTC of utilizing these tools, and 

any potential impact on DTC’s credit 

rating. 

The Recovery Plan would state that 

DTC will have entered the recovery 

phase on the date that it issues the first 

Loss Allocation Notice of the second 

loss allocation round with respect to a 

given Event Period. The Recovery Plan 

would provide that, during the recovery 

phase, DTC would continue and, as 

needed, enhance, the monitoring and 

remedial actions already described in 

connection with previous phases of the 

Crisis Continuum, and would remain in 

the recovery phase until its financial 

resources are expected to be or are fully 

replenished, or until the Wind-down 

Plan is triggered. 

The Recovery Plan would describe 

governance for the actions and tools that 

may be employed within each phase of 

the Crisis Continuum, which would be 

dictated by the facts and circumstances 

applicable to the situation being 

addressed. Such facts and 

circumstances would be measured by 

the various indicators and metrics 

applicable to that phase of the Crisis 

Continuum, and would follow relevant 

escalation protocol that would be 

described in the Recovery Plan. The 

Recovery Plan would also describe the 

governance procedures around a 

decision to cease to act for a Participant, 

pursuant to the Rules, and around the 

management and oversight of the 

subsequent liquidation of Collateral 

securities. The Recovery Plan would 

state that, overall, DTC would retain 

flexibility in accordance with the Rules, 

its governance structure, and its 

regulatory oversight, to address a 

particular situation in order to best 

protect DTC and its Participants, and to 

meet the primary objectives, throughout 

the Crisis Continuum, of minimizing 

losses and, where consistent and 

practicable, minimizing disturbance to 

affected markets. 

(ii) Non-Default Losses 

The Recovery Plan would outline how 

DTC may address losses that result from 

events other than a Participant Default. 

While these matters are addressed in 

greater detail in other documents, this 

section of the R&W Plan would provide 

a roadmap to those documents and an 

outline for DTC’s approach to 

monitoring and managing losses that 

could result from a non-default event. 

The R&W Plan would first identify some 

of the risks DTC faces that could lead to 

these losses, which include, for 

example, (1) the business and profit/loss 

risks of unexpected declines in revenue 

or growth of expenses; (2) the 

operational risks of disruptions to 

systems or processes that could lead to 

large losses, including those resulting 

from, for example, a cyber-attack; and 

(3) custody or investment risks that 

could lead to financial losses. The 

Recovery Plan would describe DTC’s 

overall strategy for the management of 

these risks, which includes a ‘‘three 

lines of defense’’ approach to risk 

management that allows for 

comprehensive management of risk 

across the organization.31 The Recovery 

Plan would also describe DTC’s 

approach to financial risk and capital 

management. The R&W Plan would 

identify key aspects of this approach, 

including, for example, an annual 

budget process, business line 

performance reviews with management, 

and regular review of capital 

requirements against LNA. These risk 

management strategies are collectively 

intended to allow DTC to effectively 

identify, monitor, and manage risks of 

non-default losses. 

The R&W Plan would identify the two 

categories of financial resources DTC 

maintains to cover losses and expenses 

arising from non-default risks or events 

as (1) LNA, maintained, monitored, and 

managed pursuant to the Capital Policy, 

which include (a) amounts held in 

satisfaction of the General Business Risk 

Capital Requirement,32 (b) the Corporate 

Contribution,33 and (c) other amounts 

held in excess of DTC’s capital 

requirements pursuant to the Capital 

Policy; and (2) resources available 

pursuant to the loss allocation 

provisions of Rule 4 (Participants Fund 

and Participants Investment).34

The R&W Plan would address the 

process by which the CFO and the 

DTCC Treasury group would determine 

which available LNA resources are most 

appropriate to cover a loss that is caused 

by a non-default event. This 

determination involves an evaluation of 

a number of factors, including the 

current and expected size of the loss, 

the expected time horizon over when 

the loss or additional expenses would 

materialize, the current and projected 

available LNA, and the likelihood LNA 

could be successfully replenished 

pursuant to the Replenishment Plan, if 

triggered.35 Finally the R&W Plan would 

discuss how DTC would apply its 

resources to address losses resulting 

from a non-default event, including the 

order of resources it would apply if the 

loss or liability is expected to exceed 

DTC’s excess LNA amounts, or is large 

relative thereto, and the Board has 

declared the event a Declared NonDefault Loss Event pursuant to Rule 4 

(Participants Fund and Participants 

Investment).36

The R&W Plan would also describe 

proposed Rule 38 (Market Disruption 

and Force Majeure), which DTC is 

proposing to adopt in the Rules. DTC 

states that this Proposed Rule is 

designed to provide transparency 

around how DTC would address 

extraordinary events that may occur 

outside its control. Specifically, the 

Proposed Rule would define a Market 

Disruption Event and the governance 

around a determination that such an 

event has occurred. The Proposed Rule 

would also describe DTC’s authority to 

take actions during the pendency of a 

Market Disruption Event that it deems 

appropriate to address such an event 

and facilitate the continuation of its 

services, if practicable. 

The R&W Plan would describe the 

interaction between the Proposed Rule 

and DTC’s existing processes and 

procedures addressing business 

continuity management and disaster 

recovery (generally, the ‘‘BCM/DR 

procedures’’). DTC states that the intent 

is to make clear that the Proposed Rule 

is designed to support those BCM/DR 

procedures and to address 

circumstances that may be exogenous to 

DTC and not necessarily addressed by 

the BCM/DR procedures. Finally, the 

R&W Plan would describe that, because 

the operation of the Proposed Rule is 

specific to each applicable Market 

Disruption Event, the Proposed Rule 

does not define a time limit on its 

application. However, the R&W Plan 


amozie on DSK3GDR082PROD with NOTICES1
Federal Register / Vol. 83, No. 169 / Thursday, August 30, 2018 / Notices 44387 

37 11 U.S.C. 101 et seq. 

38The Wind-down Plan would state that, given 

DTC’s position as a user-governed financial market 

utility, it is possible that its Participants might 

voluntarily elect to provide additional support 

during the recovery phase leading up to a potential 

trigger of the Wind-down Plan, but would also be 

designed to make clear that DTC cannot predict the 

willingness of Participants to do so. 

39Arrangements with FAST Agents and DRS 

Agents (each as defined in proposed Rule 32(A)) 

and with Settling Banks would also be assigned to 

the Transferee, so that the approach would be 

transparent to issuers and their transfer agents, as 

well as to Settling Banks. 

40 11 U.S.C. 101 et seq. 

41See 11 U.S.C. 363. 

would note that actions authorized by 

the Proposed Rule would be limited to 

the pendency of the applicable Market 

Disruption Event, as made clear in the 

Proposed Rule. DTC states that, overall, 

the Proposed Rule is designed to 

mitigate risks caused by Market 

Disruption Events and, thereby, 

minimize the risk of financial loss that 

may result from such events. 

(iii) Recovery Tool Characteristics 

The Recovery Plan would describe 

DTC’s evaluation of the tools identified 

within the Recovery Plan, and its 

rationale for concluding that such tools 

are comprehensive, effective, and 

transparent, and that such tools provide 

incentives to Participants and minimize 

negative impact on Participants and the 

financial system. 

3. DTC Wind-Down Plan 

The Wind-down Plan would provide 

the framework and strategy for the 

orderly wind-down of DTC if the use of 

the recovery tools described in the 

Recovery Plan do not successfully 

return DTC to financial viability. DTC 

states that, while DTC believes that such 

event is extremely unlikely, given the 

comprehensive nature of the recovery 

tools, DTC is proposing a wind-down 

strategy that provides for (1) the transfer 

of DTC’s business, assets, securities 

inventory, and membership to another 

legal entity, (2) such transfer being 

effected in connection with proceedings 

under Chapter 11 of the U.S. 

Bankruptcy Code,37 and (3) after 

effectuating this transfer, DTC 

liquidating any remaining assets in an 

orderly manner in bankruptcy 

proceedings. DTC states that the 

proposed transfer approach to a winddown would meet its objectives of (1) 

assuring that DTC’s critical services will 

be available to the market as long as 

there are Participants in good standing, 

and (2) minimizing disruption to the 

operations of Participants and financial 

markets generally that might be caused 

by DTC’s failure. 

In describing the transfer approach to 

DTC’s Wind-down Plan, the R&W Plan 

would identify the factors that DTC 

considered in developing this approach, 

including the fact that DTC does not 

own material assets that are unrelated to 

its clearance and settlement activities. 

Therefore, a business reorganization or 

‘‘bail-in’’ of debt approach would be 

unlikely to mitigate significant losses. 

Additionally, DTC states that its 

approach was developed in 

consideration of its critical and unique 

position in the U.S. markets, which 

precludes any approach that would 

cause DTC’s critical services to no 

longer be available. 

First, the Wind-down Plan would 

describe the potential scenarios that 

could lead to the wind-down of DTC, 

and the likelihood of such scenarios. 

The Wind-down Plan would identify 

the time period leading up to a decision 

to wind-down DTC as the Runway 

Period. DTC states that this period 

would follow the implementation of any 

recovery tools, as it may take a period 

of time, depending on the severity of the 

market stress at that time, for these tools 

to be effective or for DTC to realize a 

loss sufficient to cause it to be unable 

to borrow to complete settlement and to 

repay such borrowings.38 The Winddown Plan would identify some of the 

indicators that DTC has entered the 

Runway Period. 

The trigger for implementing the 

Wind-down Plan would be a 

determination by the Board that 

recovery efforts have not been, or are 

unlikely to be, successful in returning 

DTC to viability as a going concern. As 

described in the R&W Plan, DTC states 

that this is an appropriate trigger 

because it is both broad and flexible 

enough to cover a variety of scenarios, 

and would align incentives of DTC and 

Participants to avoid actions that might 

undermine DTC’s recovery efforts. 

Additionally, DTC states that this 

approach takes into account the 

characteristics of DTC’s recovery tools 

and enables the Board to consider (1) 

the presence of indicators of a 

successful or unsuccessful recovery, and 

(2) potential for knock-on effects of 

continued iterative application of DTC’s 

recovery tools. 

The Wind-down Plan would describe 

the general objectives of the transfer 

strategy, and would address 

assumptions regarding the transfer of 

DTC’s critical services, business, assets, 

securities inventory, and membership 39

to another legal entity that is legally, 

financially, and operationally able to 

provide DTC’s critical services to 

entities that wish to continue their 

membership following the transfer 

(‘‘Transferee’’). The Wind-down Plan 

would provide that the Transferee 

would be either (1) a third party legal 

entity, which may be an existing or 

newly established legal entity or a 

bridge entity formed to operate the 

business on an interim basis to enable 

the business to be transferred 

subsequently (‘‘Third Party 

Transferee’’); or (2) an existing, debt-free 

failover legal entity established ex-ante 

by DTCC (‘‘Failover Transferee’’) to be 

used as an alternative Transferee in the 

event that no viable or preferable Third 

Party Transferee timely commits to 

acquire DTC’s business. DTC would 

seek to identify the proposed 

Transferee, and negotiate and enter into 

transfer arrangements during the 

Runway Period and prior to making any 

filings under Chapter 11 of the U.S. 

Bankruptcy Code.40 The Wind-down 

Plan would anticipate that the transfer 

to the Transferee, including the transfer 

and establishment of the Participant and 

Pledgee securities accounts on the books 

of the Transferee, be effected in 

connection with proceedings under 

Chapter 11 of the U.S. Bankruptcy Code, 

and pursuant to a bankruptcy court 

order under Section 363 of the 

Bankruptcy Code, with the intent that 

the transfer be free and clear of claims 

against, and interests in, DTC, except to 

the extent expressly provided in the 

court’s order.41

DTC states that in order to effect a 

timely transfer of its services and 

minimize the market and operational 

disruption of such transfer, DTC would 

expect to transfer all of its critical 

services and any non-critical services 

that are ancillary and beneficial to a 

critical service, or that otherwise have 

substantial user demand from the 

continuing membership. Given the 

transfer of the securities inventory and 

the establishment on the books of the 

Transferee Participant and Pledgee 

securities accounts, DTC anticipates 

that, following the transfer, it would not 

itself continue to provide any services, 

critical or not. Following the transfer, 

the Wind-down Plan would anticipate 

that the Transferee and its continuing 

membership would determine whether 

to continue to provide any transferred 

non-critical service on an ongoing basis, 

or terminate the non-critical service 

following some transition period. DTC’s 

Wind-down Plan would anticipate that 

the Transferee would enter into a 

transition services agreement with 

DTCC so that DTCC would continue to 

provide the shared services it currently 

provides to DTC, including staffing, 

infrastructure and operational support. 


amozie on DSK3GDR082PROD with NOTICES1
44388 Federal Register / Vol. 83, No. 169 / Thursday, August 30, 2018 / Notices 

42The proposed transfer arrangements outlined in 

the Wind-down Plan do not contemplate the 

transfer of any credit or funding agreements, which 

are generally not assignable by DTC. However, to 

the extent the Transferee adopts rules substantially 

identical to those DTC has in effect prior to the 

transfer, DTC states that it would have the benefit 

of any rules-based liquidity funding. The Winddown Plan contemplates that no Participants Fund 

would be transferred to the Transferee, as it is not 

held in a bankruptcy remote manner and it is the 

primary prefunded liquidity resource to be accessed 

in the recovery phase. 

43See supra note 13. 

44See supra note 13. 

The Wind-down Plan would also 

anticipate the assignment of DTC’s 

‘‘inbound’’ link arrangements to the 

Transferee. The Wind-down Plan would 

provide that in the case of ‘‘outbound’’ 

links, DTC would seek to have the 

linked FMIs agree, at a minimum, to 

accept the Transferee as a link party for 

a transition period.42

The Wind-down Plan would provide 

that, following the effectiveness of the 

transfer to the Transferee, the winddown of DTC would involve addressing 

any residual claims against DTC through 

the bankruptcy process and liquidating 

the legal entity. The Wind-down Plan 

does not contemplate DTC continuing to 

provide services in any capacity 

following the transfer time, and any 

services not transferred would be 

terminated. 

The Wind-down Plan would also 

identify the key dependencies for the 

effectiveness of the transfer, which 

include regulatory approvals that would 

permit the Transferee to be legally 

qualified to provide the transferred 

services from and after the transfer, and 

approval by the applicable bankruptcy 

court of, among other things, the 

proposed sale, assignments, and 

transfers to the Transferee. 

The Wind-down Plan would address 

governance matters related to the 

execution of the transfer of DTC’s 

business and its wind-down. The Winddown Plan would address the duties of 

the Board to execute the wind-down of 

DTC in conformity with (1) the Rules, 

(2) the Board’s fiduciary duties, which 

mandate that it exercise reasonable 

business judgment in performing these 

duties, and (3) DTC’s regulatory 

obligations under the Act as a registered 

clearing agency. The Wind-down Plan 

would also identify certain factors the 

Board may consider in making these 

decisions, which would include, for 

example, whether DTC could safely 

stabilize the business and protect its 

value without seeking bankruptcy 

protection, and DTC’s ability to 

continue to meet its regulatory 

requirements. 

The Wind-down Plan would describe 

(1) actions DTC or DTCC may take to 

prepare for wind-down in the period 

before DTC experiences any financial 

distress, (2) actions DTC would take 

both during the recovery phase and the 

Runway Period to prepare for the 

execution of the Wind-down Plan, and 

(3) actions DTC would take upon 

commencement of bankruptcy 

proceedings to effectuate the Winddown Plan. 

Finally, the Wind-down Plan would 

include an analysis of the estimated 

time and costs to effectuate the R&W 

Plan, and would provide that this 

estimate be reviewed and approved by 

the Board annually. In order to estimate 

the length of time it might take to 

achieve a recovery or orderly winddown of DTC’s critical operations, as 

contemplated by the R&W Plan, the 

Wind-down Plan would include an 

analysis of the possible sequencing and 

length of time it might take to complete 

an orderly wind-down and transfer of 

critical operations, as described in 

earlier sections of the R&W Plan. The 

Wind-down Plan would also include in 

this analysis consideration of other 

factors, including the time it might take 

to complete any further attempts at 

recovery under the Recovery Plan. The 

Wind-down Plan would then multiply 

this estimated length of time by DTC’s 

average monthly operating expenses, 

including adjustments to account for 

changes to DTC’s profit and expense 

profile during these circumstances, over 

the previous twelve months to 

determine the amount of LNA that it 

should hold to achieve a recovery or 

orderly wind-down of DTC’s critical 

operations. The estimated wind-down 

costs would constitute the Recovery/ 

Wind-down Capital Requirement under 

the Capital Policy.43 Under that policy, 

the General Business Risk Capital 

Requirement is calculated as the greatest 

of three estimated amounts, one of 

which is this Recovery/Wind-down 

Capital Requirement.44

DTC states that the R&W Plan is 

designed as a roadmap, and the types of 

actions that may be taken both leading 

up to and in connection with 

implementation of the Wind-down Plan 

would be primarily addressed in other 

supporting documentation referred to 

therein. 

The Wind-down Plan would address 

proposed Rule 32(A) (Wind-down of the 

Corporation), which would be adopted 

to facilitate the implementation of the 

Wind-down Plan, as discussed below. 

B. Proposed Rules 

In connection with the adoption of 

the R&W Plan, DTC proposes to adopt 

the Proposed Rules, each of which is 

described below. DTC states that the 

Proposed Rules are designed to facilitate 

the execution of the R&W Plan and are 

designed to provide Participants with 

transparency as to critical aspects of the 

R&W Plan, particularly as they relate to 

the rights and responsibilities of both 

DTC and its Participants. DTC also 

states that the Proposed Rules are 

designed to provide a legal basis to 

these aspects of the R&W Plan. 

1. Rule 32(A) (Wind-Down of the 

Corporation 

DTC states that the proposed Rule 

32(A) (‘‘Wind-down Rule’’) is designed 

to facilitate the execution of the Winddown Plan. The Wind-down Rule would 

include a proposed set of defined terms 

that would be applicable only to the 

provisions of this Proposed Rule. DTC 

states that the Wind-down Rule is 

designed to make clear that a winddown of DTC’s business would occur (1) 

after a decision is made by the Board, 

and (2) in connection with the transfer 

of DTC’s services to a Transferee, as 

described therein. DTC states that, 

generally, the proposed Wind-down 

Rule is designed to create clear 

mechanisms for the transfer of Eligible 

Participants and Pledgees, Settling 

Banks, DRS Agents, and FAST Agents 

(as these terms would be defined in the 

Wind-down Rule), and DTC’s inventory 

of financial assets in order to provide for 

continued access to critical services and 

to minimize disruption to the markets in 

the event the Wind-down Plan is 

initiated. 

(i) Wind-Down Trigger 

First, DTC states that the Proposed 

Rule is designed to make clear that the 

Board is responsible for initiating the 

Wind-down Plan, and would identify 

the criteria the Board would consider 

when making this determination. As 

provided for in the Wind-down Plan 

and in the proposed Wind-down Rule, 

the Board would initiate the Winddown Plan if, in the exercise of its 

business judgment and subject to its 

fiduciary duties, it has determined that 

the execution of the Recovery Plan has 

not or is not likely to restore DTC to 

viability as a going concern, and the 

implementation of the Wind-down Plan, 

including the transfer of DTC’s business, 

is in the best interests of DTC, its 

Participants and Pledgees, its 

shareholders and creditors, and the U.S. 

financial markets. 


amozie on DSK3GDR082PROD with NOTICES1
Federal Register / Vol. 83, No. 169 / Thursday, August 30, 2018 / Notices 44389 

(ii) Identification of Critical Services; 

Designation of Dates and Times for 

Specific Actions 

The Proposed Rule would provide 

that, upon making a determination to 

initiate the Wind-down Plan, the Board 

would identify the critical and noncritical services that would be 

transferred to the Transferee at the 

Transfer Time (as defined in the 

Proposed Rule), as well as any noncritical services that would not be 

transferred to the Transferee. The 

proposed Wind-down Rule would 

establish that any services transferred to 

the Transferee will only be provided by 

the Transferee as of the Transfer Time, 

and that any non-critical services that 

are not transferred to the Transferee 

would be terminated at the Transfer 

Time. The Proposed Rule would also 

provide that the Board would establish 

(1) an effective time for the transfer of 

DTC’s business to a Transferee 

(‘‘Transfer Time’’), and (2) the last day 

that instructions in respect of securities 

and other financial products may be 

effectuated through the facilities of DTC 

(the ‘‘Last Activity Date’’). DTC states 

that the Proposed Rule is designed to 

make clear that DTC would not accept 

any transactions for settlement after the 

Last Activity Date. Any transactions to 

be settled after the Transfer Time would 

be required to be submitted to the 

Transferee, and would not be DTC’s 

responsibility. 

(iii) Notice Provisions 

The proposed Wind-down Rule 

would provide that, upon a decision to 

implement the Wind-down Plan, DTC 

would provide its Participants, 

Pledgees, DRS Agents, FAST Agents, 

Settling Banks and regulators with a 

notice that includes material 

information relating to the Wind-down 

Plan and the anticipated transfer of 

DTC’s Participants and business, 

including, for example, (1) a brief 

statement of the reasons for the decision 

to implement the Wind-down Plan; (2) 

identification of the Transferee and 

information regarding the transaction by 

which the transfer of DTC’s business 

would be effected; (3) the Transfer Time 

and Last Activity Date; and (4) 

identification of Participants and the 

critical and non-critical services that 

would be transferred to the Transferee at 

the Transfer Time, as well as those NonEligible Participants (as defined below 

and in the Proposed Rule) and any noncritical services that would not be 

included in the transfer. DTC would 

also make available the rules and 

procedures and membership agreements 

of the Transferee. 

(iv) Transfer of Membership 

The proposed Wind-down Rule 

would address the expected transfer of 

DTC’s membership to the Transferee, 

which DTC would seek to effectuate by 

entering into an arrangement with a 

Failover Transferee, or by using 

commercially reasonable efforts to enter 

into such an arrangement with a Third 

Party Transferee. Thus, under the 

proposal, in connection with the 

implementation of the Wind-down Plan 

and with no further action required by 

any party: 

(1) Each Eligible Participant would 

become (i) a Participant of the 

Transferee and (ii) a party to a 

Participants agreement with the 

Transferee; 

(2) each Participant that is delinquent 

in the performance of any obligation to 

DTC or that has provided notice of its 

election to withdraw as a Participant (a 

‘‘Non-Eligible Participant’’) as of the 

Transfer Time would become (i) the 

holder of a transition period securities 

account maintained by the Transferee 

on its books (‘‘Transition Period 

Securities Account’’) and (ii) a party to 

a Transition Period Securities Account 

agreement of the Transferee; 

(3) each Pledgee would become (i) a 

Pledgee of the Transferee and (ii) a party 

to a Pledgee agreement with the 

Transferee; 

(4) each DRS Agent would become (i) 

a DRS Agent of the Transferee and (ii) 

a party to a DRS Agent agreement with 

the Transferee; 

(5) each FAST Agent would become 

(i) a FAST Agent of the Transferee and 

(ii) a party to a FAST Agent agreement 

with the Transferee; and 

(6) each Settling Bank for Participants 

and Pledgees would become (i) a 

Settling Bank for Participants and 

Pledgees of the Transferee and (ii) a 

party to a Settling Bank Agreement with 

the Transferee. 

Further, DTC states that the Proposed 

Rule is designed to make clear that it 

would not prohibit (1) Non-Eligible 

Participants from applying for 

membership with the Transferee, (2) 

Non-Eligible Participants that have 

become holders of Transition Period 

Securities Accounts (‘‘Transition Period 

Securities Account Holders’’) of the 

Transferee from withdrawing as a 

Transition Period Securities Account 

Holder from the Transferee, subject to 

the rules and procedures of the 

Transferee, and (3) Participants, 

Pledgees, DRS Agents, FAST Agents, 

and Settling Banks that would be 

transferred to the Transferee from 

withdrawing from membership with the 

Transferee, subject to the rules and 

procedures of the Transferee. Under the 

Proposed Rule, Non-Eligible 

Participants that have become 

Transition Period Securities Account 

Holders of the Transferee shall have the 

rights and be subject to the obligations 

of Transition Period Securities Account 

Holders set forth in special provisions of 

the rules and procedures of the 

Transferee applicable to such Transition 

Period Securities Account Holder. 

Specifically, Non-Eligible Participants 

that become Transition Period 

Securities Account Holders must, 

within the Transition Period (as defined 

in the Proposed Rule), instruct the 

Transferee to transfer the financial 

assets credited to its Transition Period 

Securities Account (i) to a Participant of 

the Transferee through the facilities of 

the Transferee or (ii) to a recipient 

outside the facilities of the Transferee, 

and no additional financial assets may 

be delivered versus payment to a 

Transition Period Securities Account 

during the Transition Period. 

(v) Transfer of Inventory of Financial 

Assets 

The proposed Wind-down Rule 

would provide that DTC would enter 

into arrangements with a Failover 

Transferee, or would use commercially 

reasonable efforts to enter into 

arrangements with a Third Party 

Transferee, providing that, in either 

case, at Transfer Time: 

(1) DTC would transfer to the 

Transferee (i) its rights with respect to 

its nominee Cede & Co. (‘‘Cede’’) (and 

thereby its rights with respect to the 

financial assets owned of record by 

Cede), (ii) the financial assets held by it 

at the FRBNY, (iii) the financial assets 

held by it at other CSDs, (iv) the 

financial assets held in custody for it 

with FAST Agents, (v) the financial 

assets held in custody for it with other 

custodians and (vi) the financial assets 

it holds in physical custody. 

(2) The Transferee would establish 

security entitlements on its books for 

Eligible Participants of DTC that become 

Participants of the Transferee that 

replicate the security entitlements that 

DTC maintained on its books 

immediately prior to the Transfer Time 

for such Eligible Participants, and DTC 

would simultaneously eliminate such 

security entitlements from its books. 

(3) The Transferee would establish 

security entitlements on its books for 

Non-Eligible Participants of DTC that 

become Transition Period Securities 

Account Holders of the Transferee that 

replicate the security entitlements that 

DTC maintained on its books 

immediately prior to the Transfer Time 

for such Non-Eligible Participants, and 


amozie on DSK3GDR082PROD with NOTICES1
44390 Federal Register / Vol. 83, No. 169 / Thursday, August 30, 2018 / Notices 

45Nothing in the proposed Wind-down Rule 

would seek to prevent a Participant that retired its 

membership at DTC from applying for membership 

with the Transferee. Once its DTC membership is 

terminated, however, such firm would not be able 

to benefit from the membership assignment that 

would be effected by this proposed Wind-down 

Rule, and it would have to apply for membership 

directly with the Transferee, subject to its 

membership application and review process. 

DTC would simultaneously eliminate 

such security entitlements from its 

books. 

(4) The Transferee would establish 

pledges on its books in favor of Pledgees 

that become Pledgees of the Transferee 

that replicate the pledges that DTC 

maintained on its books immediately 

prior to the Transfer Time in favor of 

such Pledgees, and DTC shall 

simultaneously eliminate such pledges 

from its books. 

(vi) Comparability Period 

DTC states that the proposed 

automatic mechanism for the transfer of 

DTC’s membership is intended to 

provide DTC’s membership with 

continuous access to critical services in 

the event of DTC’s wind-down, and to 

facilitate the continued prompt and 

accurate clearance and settlement of 

securities transactions. The proposed 

Wind-down Rule would provide that 

DTC would enter into arrangements 

with a Failover Transferee, or would use 

commercially reasonable efforts to enter 

into arrangements with a Third Party 

Transferee, providing that, in either 

case, with respect to the critical services 

and any non-critical services that are 

transferred from DTC to the Transferee, 

for at least a period of time to be agreed 

upon (‘‘Comparability Period’’), the 

business transferred from DTC to the 

Transferee would be operated in a 

manner that is comparable to the 

manner in which the business was 

previously operated by DTC. 

Specifically, the proposed Wind-down 

Rule would provide that: (1) The rules 

of the Transferee and terms of 

Participant, Pledgee, DRS Agent, FAST 

Agent and Settling Bank agreements 

would be comparable in substance and 

effect to the analogous Rules and 

agreements of DTC, (2) the rights and 

obligations of any Participants, 

Pledgees, DRS Agents, FAST Agents, 

and Settling Banks that are transferred 

to the Transferee would be comparable 

in substance and effect to their rights 

and obligations as to DTC, and (3) the 

Transferee would operate the 

transferred business and provide any 

services that are transferred in a 

comparable manner to which such 

services were provided by DTC. 

DTC states that the purpose of these 

provisions and the intended effect of the 

proposed Wind-down Rule is to 

facilitate a smooth transition of DTC’s 

business to a Transferee and to provide 

that, for at least the Comparability 

Period, the Transferee (1) would operate 

the transferred business in a manner 

that is comparable in substance and 

effect to the manner in which the 

business was operated by DTC, and (2) 

would not require sudden and 

disruptive changes in the systems, 

operations and business practices of the 

new Participants, Pledgees, DRS Agents, 

FAST Agents, and Settling Banks of the 

Transferee. 

(vii) Subordination of Claims Provisions 

and Miscellaneous Matters 

The proposed Wind-down Rule 

would include a provision addressing 

the subordination of unsecured claims 

against DTC of its Participants who fail 

to participate in DTC’s recovery efforts 

(i.e., firms delinquent in their 

obligations to DTC or elect to retire from 

DTC in order to minimize their 

obligations with respect to the 

allocation of losses, pursuant to the 

Rules). DTC states that this provision is 

designed to incentivize Participants to 

participate in DTC’s recovery efforts.45

The proposed Wind-down Rule 

would address other ex-ante matters, 

including provisions providing that its 

Participants, Pledgees, DRS Agents, 

FAST Agents and Settling Banks (1) will 

assist and cooperate with DTC to 

effectuate the transfer of DTC’s business 

to a Transferee, (2) consent to the 

provisions of the rule, and (3) grant DTC 

power of attorney to execute and deliver 

on their behalf documents and 

instruments that may be requested by 

the Transferee. Finally, the Proposed 

Rule would include a limitation of 

liability for any actions taken or omitted 

to be taken by DTC pursuant to the 

Proposed Rule. 

DTC states that the purpose of the 

limitation of liability is to facilitate and 

protect DTC’s ability to act 

expeditiously in response to 

extraordinary events. Such limitation of 

liability would be available only 

following triggering of the Wind-down 

Plan. In addition, and as a separate 

matter, DTC states that the limitation of 

liability provides Participants with 

transparency for the unlikely situation 

when those extraordinary events could 

occur, as well as supporting the legal 

framework within which DTC would 

take such actions. DTC states that these 

provisions, collectively, are designed to 

enable DTC to take such acts as the 

Board determines necessary to 

effectuate an orderly transfer and winddown of its business should recovery 

efforts prove unsuccessful. 

2. Rule 38 (Market Disruption and Force 

Majeure) 

The proposed Rule 38 (‘‘Force 

Majeure Rule’’) would address DTC’s 

authority to take certain actions upon 

the occurrence, and during the 

pendency, of a Market Disruption Event, 

as defined therein. DTC states that the 

Proposed Rule is designed to clarify 

DTC’s ability to take actions to address 

extraordinary events outside of the 

control of DTC and of its membership, 

and to mitigate the effect of such events 

by facilitating the continuity of services 

(or, if deemed necessary, the temporary 

suspension of services). To that end, 

under the proposed Force Majeure Rule, 

DTC would be entitled, during the 

pendency of a Market Disruption Event, 

to (1) suspend the provision of any or 

all services, and (2) take, or refrain from 

taking, or require its Participants and 

Pledgees to take, or refrain from taking, 

any actions it considers appropriate to 

address, alleviate, or mitigate the event 

and facilitate the continuation of DTC’s 

services as may be practicable. 

The proposed Force Majeure Rule 

would identify the events or 

circumstances that would be considered 

a Market Disruption Event. The 

proposed Force Majeure Rule would 

define the governance procedures for 

how DTC would determine whether, 

and how, to implement the provisions 

of the rule. A determination that a 

Market Disruption Event has occurred 

would generally be made by the Board, 

but the Proposed Rule would provide 

for limited, interim delegation of 

authority to a specified officer or 

management committee if the Board 

would not be able to take timely action. 

In the event such delegated authority is 

exercised, the proposed Force Majeure 

Rule would require that the Board be 

convened as promptly as practicable, no 

later than five Business Days after such 

determination has been made, to ratify, 

modify, or rescind the action. The 

proposed Force Majeure Rule would 

also provide for prompt notification to 

the Commission, and advance 

consultation with Commission staff, 

when practicable, including notification 

when an event is no longer continuing 

and the relevant actions are terminated. 

The Proposed Rule would require 

Participants and Pledgees to notify DTC 

immediately upon becoming aware of a 

Market Disruption Event, and, likewise, 

would require DTC to notify its 

Participants and Pledgees if it has 

triggered the Proposed Rule and of 

actions taken or intended to be taken 

thereunder. 

Finally, the Proposed Rule would 

address other related matters, including 


amozie on DSK3GDR082PROD with NOTICES1
Federal Register / Vol. 83, No. 169 / Thursday, August 30, 2018 / Notices 44391 

46See 12 U.S.C. 5461(b). 

47 12 U.S.C. 5464(a)(2). 

48 12 U.S.C. 5464(b). 

49 12 U.S.C. 5464(a)(2). 

50 15 U.S.C. 78q–1. 

51See 17 CFR 240.17Ad–22. 

52 Id. 

53 12 U.S.C. 5464(b). 

54See 17 CFR 240.17Ad–22. 55 12 U.S.C. 5464(b). 

a limitation of liability for any failure or 

delay in performance, in whole or in 

part, arising out of the Market 

Disruption Event. DTC states that the 

purpose of the limitation of liability 

would be similar to the purpose of the 

analogous provision in the proposed 

Wind-down Rule, which is to facilitate 

and protect DTC’s ability to act 

expeditiously in response to 

extraordinary events. 

II. Discussion and Commission 

Findings 

Although the Clearing Supervision 

Act does not specify a standard of 

review for an advance notice, its stated 

purpose is instructive: to mitigate 

systemic risk in the financial system 

and promote financial stability by, 

among other things, promoting uniform 

risk management standards for 

systemically important financial market 

utilities and strengthening the liquidity 

of systemically important financial 

market utilities.46

Section 805(a)(2) of the Clearing 

Supervision Act 47 authorizes the 

Commission to prescribe risk 

management standards for the payment, 

clearing and settlement activities of 

designated clearing entities engaged in 

designated activities for which the 

Commission is the supervisory agency. 

Section 805(b) of the Clearing 

Supervision Act 48 provides the 

following objectives and principles for 

the Commission’s risk management 

standards prescribed under Section 

805(a): 

• To promote robust risk 

management; 

• to promote safety and soundness; 

• to reduce systemic risks; and 

• to support the stability of the 

broader financial system. 

The Commission has adopted risk 

management standards under Section 

805(a)(2) of the Clearing Supervision 

Act 49 and Section 17A of the Act 50

(‘‘Rule 17Ad–22’’).51 Rule 17Ad–22 

requires registered clearing agencies to 

establish, implement, maintain, and 

enforce written policies and procedures 

that are reasonably designed to meet 

certain minimum requirements for their 

operations and risk management 

practices on an ongoing basis.52

Therefore, it is appropriate for the 

Commission to review proposed 

changes in advance notices against the 

objectives and principles of these risk 

management standards as described in 

Section 805(b) of the Clearing 

Supervision Act 53 and against Rule 

17Ad–22.54

A. Consistency With Section 805(b) of 

the Clearing Supervision Act 

The Commission believes that the 

proposed changes in the Advance 

Notice are designed to help DTC 

promote robust risk management, 

promote safety and soundness, reduce 

systemic risks, and support the stability 

of the broader financial system. As 

described above, the R&W Plan, 

generally, would help DTC promote 

robust risk management and reduce 

systemic risks by providing DTC with a 

roadmap for actions it may employ to 

monitor and manage its risks, and, as 

needed, to stabilize its financial 

condition in the event those risks 

materialize. Specifically, the Recovery 

Plan would provide a roadmap that 

would identify a number of triggers for 

the potential application of a number of 

available recovery tools. Identifying 

triggers for the potential application of 

recovery tools would help promote 

robust risk management and reduce 

systemic risks by better enabling DTC to 

more promptly determine when and 

how it may need to manage a significant 

stress event, and, as needed, stabilize its 

financial condition. 

Similarly, the Force Majeure Rule is 

designed to provide a roadmap to 

address extraordinary events that may 

occur outside of DTC’s control. 

Specifically, the Force Majeure Rule 

would define a Market Disruption Event 

and provide governance around 

determining when such an event has 

occurred. The Force Majeure Rule also 

would describe DTC’s authority to take 

actions during the pendency of a Market 

Disruption Event that it deems 

appropriate to address such an event 

and facilitate the continuation of DTC’s 

services, if practicable. By defining a 

Market Disruption Event and providing 

such governance and authority, the 

Commission believes that the Force 

Majeure Rule also would help promote 

robust risk management and reduce 

systemic risks by improving DTC’s 

ability to identify and manage a force 

majeure event, and, as needed, to 

stabilize its financial condition so that 

DTC can continue to operate and act as 

a source of stability for the financial 

markets it serves. 

The Commission believes that the 

Recovery Plan and the Force Majeure 

Rule reflect an approach designed to 

allow for a more considered and 

comprehensive evaluation by DTC of a 

stressed market situation and the ways 

in which DTC could apply available 

recovery tools in a manner intended to 

minimize the potential negative effects 

of the stress situation for DTC, its 

membership, and the broader financial 

system. Therefore, the Commission 

believes that the Recovery Plan and the 

Force Majeure Rule would help promote 

robust risk management at DTC and, 

thus, reduce systemic risks by 

establishing a means for DTC to best 

determine the most appropriate way to 

address such stress situations in an 

effective manner. 

The Commission believes that the 

R&W Plan, generally, would help DTC 

promote safety and soundness and 

support the stability of the broader 

financial system by providing a 

roadmap to wind-down that is designed 

to ensure the availability of DTC’s 

critical services to the marketplace, 

while reducing disruption to the 

operations of Participants and financial 

markets that might be caused by DTC’s 

failure. Specifically, as described above, 

the Wind-down Plan, as facilitated by 

the Wind-down Rule, would provide for 

the wind-down of DTC’s business and 

transfer of membership and critical 

services if the recovery tools do not 

successfully return DTC to financial 

viability. Accordingly, critical services, 

such as services that lack alternative 

providers or products as well as services 

that are interconnected with other 

participants and processes within the 

U.S. financial system would be able to 

continue in an orderly manner while 

DTC is seeking to wind-down its 

services. By designing the Wind-down 

Plan and the Wind-down Rule to enable 

the continuity of DTC’s critical services 

and membership in an orderly manner 

while DTC is seeking to wind-down its 

services, the Commission believes these 

proposed changes would help DTC 

promote safety and soundness and 

support stability in the broader financial 

system in the event the Wind-down 

Plan is implemented. 

By better enabling DTC to promote 

robust risk management, promote safety 

and soundness, reduce systemic risks, 

and support the stability of the broader 

financial system, as described above, the 

Commission believes that the proposed 

changes in the Advance Notice are 

consistent with Section 805(b) of the 

Clearing Supervision Act.55


amozie on DSK3GDR082PROD with NOTICES1
44392 Federal Register / Vol. 83, No. 169 / Thursday, August 30, 2018 / Notices 

56A ‘‘covered clearing agency’’ means, among 

other things, a clearing agency registered with the 

Commission under Section 17A of the Exchange 

Act (15 U.S.C. 78q–1 et seq.) that is designated 

systemically important by the Financial Stability 

Oversight Counsel (‘‘FSOC’’) pursuant to the 

Clearing Supervision Act (12 U.S.C. 5461 et seq.). 

See 17 CFR 240.17Ad–22(a)(5)–(6). On July 18, 

2012, FSOC designated DTC as systemically 

important. U.S. Department of the Treasury, ‘‘FSOC 

Makes First Designations in Effort to Protect Against 

Future Financial Crises,’’ available at https://

www.treasury.gov/press-center/press-releases/ 

Pages/tg1645.aspx. Therefore, DTC is a covered 

clearing agency. 

57 17 CFR 240.17Ad–22(e)(2)(i). 

58 15 U.S.C. 78q–1. 

59 17 CFR 240.17Ad–22(e)(2)(iii). 

60 17 CFR 240.17Ad–22(e)(2)(v). 

61 15 U.S.C. 78q–1. 

62 17 CFR 240.17Ad–22(e)(2)(i), (iii), and (v). 63 17 CFR 240.17Ad–22(e)(3)(ii). 

B. Consistency With Rules 17Ad– 

22(e)(2)(i), (iii), and (v) Under the Act 

Rule 17Ad–22(e)(2)(i) under the Act 

requires a covered clearing agency 56 to 

establish, implement, maintain, and 

enforce written policies and procedures 

reasonably designed to provide for 

governance arrangements that are clear 

and transparent.57 Rule 17Ad– 

22(e)(2)(iii) under the Act requires a 

covered clearing agency to establish, 

implement, maintain, and enforce 

written policies and procedures 

reasonably designed to provide for 

governance arrangements that support 

the public interest requirements in 

Section 17A of the Act 58 applicable to 

clearing agencies, and the objectives of 

owners and participants.59 Rule 17Ad– 

22(e)(2)(v) under the Act requires a 

covered clearing agency to establish, 

implement, maintain, and enforce 

written policies and procedures 

reasonably designed to provide for 

governance arrangements that specify 

clear and direct lines of responsibility.60

As described above, the R&W Plan is 

designed to identify clear lines of 

responsibility concerning the R&W Plan 

including (1) the ongoing development 

of the R&W Plan; (2) ongoing 

maintenance of the R&W Plan; (3) 

reviews and approval of the R&W Plan; 

and (4) the functioning and 

implementation of the R&W Plan. As 

described above, the R&R Team, which 

reports to the Management Committee, 

is responsible for maintaining the R&W 

Plan and for the development and 

ongoing maintenance of the overall 

recovery and wind-down planning 

process. Meanwhile, the Board, or such 

committees as may be delegated 

authority by the Board from time to time 

pursuant to its charter, would review 

and approve the R&W Plan biennially, 

and also would review and approve any 

changes that are proposed to the R&W 

Plan outside of the biennial review. 

Moreover, the R&W Plan would state the 

stages of escalation required to manage 

recovery under the Recovery Plan or to 

invoke DTC’s wind–down under the 

Wind-down Plan, which would range 

from relevant business line managers up 

to the Board. The R&W Plan would 

identify the parties responsible for 

certain activities under both the 

Recovery Plan and the Wind-down Plan, 

and would describe their respective 

roles. The R&W Plan also would specify 

the process DTC would take to receive 

input from various parties at DTC, 

including management committees and 

the Board. 

In considering the above, the 

Commission believes that the R&W Plan 

would help contribute to establishing, 

implementing, maintaining, and 

enforcing written policies and 

procedures reasonably designed to 

provide for governance arrangements 

that are clear and transparent because it 

would specify lines of control. The 

Commission also believes that the R&W 

Plan would help contribute to 

establishing, implementing, 

maintaining, and enforcing written 

policies and procedures reasonably 

designed to provide for governance 

arrangements that support the public 

interest requirements in Section 17A of 

the Act 61 applicable to clearing 

agencies, and the objectives of owners 

and participants because the R&W Plan 

specifies the process DTC would take to 

receive input from various DTC 

stakeholders. In addition, the 

Commission believes that the R&W Plan 

would help contribute to establishing, 

implementing, maintaining, and 

enforcing written policies and 

procedures reasonably designed to 

provide for governance arrangements 

that specify clear and direct lines of 

responsibility because it specifies who 

is responsible for the ongoing 

development, maintenance, reviews, 

approval, functioning, and 

implementation of the R&W Plan. 

Therefore, the Commission believes 

that the R&W Plan is consistent with 

Rules 17Ad–22(e)(2)(i), (iii), and (v) 

under the Act.62

C. Consistency With Rule 17Ad– 

22(e)(3)(ii) Under the Act 

Rule 17Ad–22(e)(3)(ii) under the Act 

requires a covered clearing agency to 

establish, implement, maintain, and 

enforce written policies and procedures 

reasonably designed to maintain a 

sound risk management framework for 

comprehensively managing legal, credit, 

liquidity, operational, general business, 

investment, custody, and other risks 

that arise in or are borne by the covered 

clearing agency, which includes plans 

for the recovery and orderly wind-down 

of the covered clearing agency 

necessitated by credit losses, liquidity 

shortfalls, losses from general business 

risk, or any other losses.63

As described above, the R&W Plan’s 

Recovery Plan provides a plan for DTC’s 

recovery necessitated by credit losses, 

liquidity shortfalls, losses from general 

business risk, or any other losses by 

defining the risk management activities, 

stress conditions and indicators, and 

tools that DTC may use to address stress 

scenarios that could eventually prevent 

DTC from being able to provide its 

critical services as a going concern. 

More specifically, through the 

framework of the Crisis Continuum, 

which identifies tools that can be 

employed to mitigate losses and 

mitigate or minimize liquidity needs as 

the market environment becomes 

increasingly stressed, the Recovery Plan 

would identify measures that DTC may 

take to manage risks of credit losses and 

liquidity shortfalls, and other losses that 

could arise from a Participant Default. 

The Recovery Plan also would address 

DTC’s management of general business 

risks and other non-default risks that 

could lead to losses by identifying 

potential non-default losses and the 

resources available to DTC to address 

such losses, including recovery triggers 

and tools to mitigate such losses. 

Therefore, the Commission believes that 

the R&W Plan’s Recovery Plan helps 

DTC establish, implement, maintain, 

and enforce written policies and 

procedures reasonably designed to 

maintain a sound risk management 

framework for comprehensively 

managing legal, credit, liquidity, 

operational, general business, 

investment, custody, and other risks 

that arise in or are borne by DTC, which 

includes a recovery plan necessitated by 

credit losses, liquidity shortfalls, losses 

from general business risk, or any other 

losses. 

As described above, the R&W Plan’s 

Wind-down Plan provides a plan for 

orderly wind-down of DTC, which 

would be triggered by a determination 

by the Board that recovery efforts have 

not been, or are unlikely to be, 

successful in returning DTC to viability 

as a going concern. Once triggered, the 

Wind-down Plan sets forth mechanisms 

for the transfer of DTC’s membership 

and business, and it is designed to 

maintain continued access to DTC’s 

critical services and to minimize market 

impact of the transfer while DTC is 

seeking to ultimately wind-down its 

services. Specifically, the Wind-down 

Plan would provide for the transfer of 


amozie on DSK3GDR082PROD with NOTICES1
Federal Register / Vol. 83, No. 169 / Thursday, August 30, 2018 / Notices 44393 

64 11 U.S.C. 101 et seq. 

65See, e.g., 11 U.S.C. 363, 726, and 1129(a)(7). 

66See 11 U.S.C. 363(f). 

67The Wind-down Plan would identify certain 

factors the Board may consider in evaluating 

alternatives, which would include, for example, 

whether DTC could safely stabilize the business and 

protect its value without seeking bankruptcy 

protection, and DTC’s ability to continue to meet its 

regulatory requirements. 

68 17 CFR 240.17Ad–22(e)(3)(ii). 

69 17 CFR 240.17Ad–22(e)(15)(i). 

70 17 CFR 240.17Ad–22(e)(3)(ii). 

71 17 CFR 240.17Ad–22(e)(15)(ii). 

72Supra note 13. 

73 17 CFR 240.17Ad–22(e)(15)(i) and (ii). 

74 12 U.S.C. 5465(e)(1)(I). 

1 12 U.S.C. 5465(e)(1). 

2 17 CFR 240.19b–4(n)(1)(i). 

3On December 18, 2017, DTC filed the advance 

notice as 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’’). 15 U.S.C. 78s(b)(1) and 17 CFR 

240.19b–4, respectively. The Proposed Rule Change 

Continued 

DTC’s business, assets, securities 

inventory, and membership to another 

legal entity with such transfer being 

effected in connection with proceedings 

under Chapter 11 of the U.S. 

Bankruptcy Code.64 After effectuating 

this transfer, DTC would liquidate any 

remaining assets in an orderly manner 

in bankruptcy proceedings. 

Although the Commission is not 

opining on the Wind-down Plan’s 

consistency with the U.S. Bankruptcy 

Code, in reviewing the proposed 

changes, the Commission believes that 

DTC’s intent to use bankruptcy 

proceedings to achieve an orderly 

liquidation of assets after any transfer of 

DTC’s business appears reasonable, in 

light of the provisions of the Bankruptcy 

Code that address the liquidation and 

distribution of a debtor’s property 

among creditors and interest holders.65

Under many circumstances, Section 363 

of the Bankruptcy Code provides for the 

sale of property ‘‘free and clear of any 

interest in such property of an entity 

other than the estate[.]’’ 66 The 

Commission believes that DTC’s 

analysis regarding the applicability of 

these provisions, while not free from 

doubt, presents a reasonable approach 

to liquidation in light of the 

circumstances and the available 

alternatives.67 Therefore, the 

Commission believes that the R&W 

Plan’s Wind-down Plan helps DTC 

establish, implement, maintain, and 

enforce written policies and procedures 

reasonably designed to maintain a 

sound risk management framework for 

comprehensively managing legal, credit, 

liquidity, operational, general business, 

investment, custody, and other risks 

that arise in or are borne by DTC, which 

includes a wind-down plan necessitated 

by credit losses, liquidity shortfalls, 

losses from general business risk, or any 

other losses. 

Therefore, the Commission believes 

that the R&W Plan is consistent with 

Rule 17Ad–22(e)(3)(ii) under the Act.68

D. Consistency With Rules 17Ad– 

22(e)(15)(i)–(ii) Under the Act 

Rule 17Ad–22(e)(15)(i) under the Act 

requires a covered clearing agency to 

establish, implement, maintain, and 

enforce written policies and procedures 

reasonably designed to identify, 

monitor, and manage its general 

business risk and hold sufficient liquid 

net assets funded by equity to cover 

potential general business losses so that 

the covered clearing agency can 

continue operations and services as a 

going concern if those losses 

materialize, including by determining 

the amount of liquid net assets funded 

by equity based upon its general 

business risk profile and the length of 

time required to achieve a recovery or 

orderly wind-down, as appropriate, of 

its critical operations and services if 

such action is taken.69 Rule 17Ad– 

22(e)(15)(ii) under the Act requires a 

covered clearing agency to establish, 

implement, maintain, and enforce 

written policies and procedures 

reasonably designed to identify, 

monitor, and manage its general 

business risk and hold sufficient liquid 

net assets funded by equity to cover 

potential general business losses so that 

the covered clearing agency can 

continue operations and services as a 

going concern if those losses 

materialize, including by holding liquid 

net assets funded by equity 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, as contemplated by the 

plans established under Rule 17Ad– 

22(e)(3)(ii) under the Act,70 discussed 

above.71

As discussed above, DTC’s Capital 

Policy is designed to address how DTC 

holds LNA in compliance with these 

requirements,72 while the Wind-down 

Plan would include an analysis to 

estimate the amount of time and cost to 

achieve a recovery or orderly winddown of DTC’s critical operations and 

services, and would provide that the 

Board review and approve this analysis 

and estimation annually. The Winddown Plan also would 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 amount of 

LNA that DTC plans to 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, the 

Commission believes that the R&W Plan 

is consistent with Rules 17Ad– 

22(e)(15)(i) and (ii) under the Act.73

III. Conclusion 

It is therefore noticed, pursuant to 

Section 806(e)(1)(I) of the Clearing 

Supervision Act,74 that the Commission 

does not object to advance notice SR– 

DTC–2017–803, as modified by 

Amendment No. 1, and that DTC is 

authorized to implement the proposal as 

of the date of this notice or the date of 

an order by the Commission approving 

proposed rule change SR–DTC–2017– 

021, as modified by Amendment No. 1, 

whichever is later. 

By the Commission. 

Eduardo A. Aleman, 

Assistant Secretary. 

[FR Doc. 2018–18867 Filed 8–29–18; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–83950; File No. SR–DTC– 

2017–804] 

Self-Regulatory Organizations; The 

Depository Trust Company; Notice of 

No Objection to an Advance Notice, as 

Modified by Amendment No. 1, To 

Amend the Loss Allocation Rules and 

Make Other Changes 

August 27, 2018. 

On December 18, 2017, The 

Depository Trust Company (‘‘DTC’’) 

filed with the Securities and Exchange 

Commission (‘‘Commission’’) advance 

notice SR–DTC–2017–804 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’’) 1 and Rule 19b– 

4(n)(1)(i) under the Securities Exchange 

Act of 1934 (‘‘Act’’) 2 to amend DTC’s 

application of the Participants Fund, 

loss allocation rules, voluntary 

retirement process for Participants, the 

return of certain deposits to former 

Participants, and make other 

conforming and technical changes.3 The 


amozie on DSK3GDR082PROD with NOTICES1