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[Federal Register Volume 89, Number 26 (Wednesday, February 7, 2024)]
[Notices]
[Pages 8466-8469]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-02420]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-99456; File No. SR-DTC-2023-013]

Self-Regulatory Organizations; The Depository Trust Company; 
Order Approving of Proposed Rule Change To Modify the DTC Settlement 
Service Guide

February 1, 2024.

I. Introduction

    On December 20, 2023, The Depository Trust Company (``DTC'') filed 
with the Securities and Exchange Commission (``Commission'') proposed 
rule change SR-DTC-2023-013 (``Proposed Rule Change'') pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ 
and Rule 19b-4 thereunder.\2\ The Proposed Rule Change was published 
for comment in the Federal Register on December 28, 2023.\3\ The 
Commission has received no comments on the Proposed Rule Change. For 
the reasons discussed below, the Commission is approving the Proposed 
Rule Change.\4\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 99234 (Dec. 22, 
2023), 88 FR 89752 (Dec. 28, 2023) (File No. SR-DTC-2023-013) 
(``Notice of Filing'').
    \4\ Capitalized terms not defined herein are defined in the 
Rules, By-Laws and Organization Certificate of DTC (``Rules'') and 
the DTC Settlement Service Guide (``Settlement Guide''), available 
at https://www.dtcc.com/legal/rules-and-procedures.aspx.

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[[Page 8467]]

II. Background

    DTC serves as a central securities depository providing, in part, 
custodial services for equity securities, which include the 
safekeeping, record keeping, book-entry transfer, and pledge of 
securities among its Participants.\5\ DTC uses certain risk management 
controls, including its Collateral Monitor and Net Debit Cap, to 
protect the DTC settlement system in the event of a Participant default 
by ensuring that at any time the settlement obligation of any 
Participant will be fully collateralized and the amount due in 
settlement cannot exceed DTC liquidity resources.\6\
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    \5\ See The Depository Trust Company, Disclosure Framework for 
Covered Clearing Agencies and Financial Market Infrastructures (Mar. 
2023) (``Disclosure Framework''), available at https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/DTC_Disclosure_Framework.pdf.
    \6\ See id.
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    The Collateral Monitor \7\ tracks whether each Participant has 
available sufficient collateral value to secure funding for a 
Participant's net settlement obligation, in the event of the 
Participant's default.\8\ As such, the Collateral Monitor requires net 
debit settlement obligations to be fully collateralized as they accrue 
intraday, preventing the completion of transactions that would cause a 
Participant's Net Debit Balance \9\ to exceed the value of the 
Collateral in the Participant's account.\10\ DTC states that this 
ensures it will have sufficient Collateral to obtain funding for 
settlement if a Participant fails to pay for its settlement 
obligations.\11\ The Collateral Monitor tracks the value of Collateral 
supporting the settlement obligation of each Participant, where the 
collateral value of a security is the market price less the haircut 
amount determined by DTC.\12\ Throughout the day, debits and credits to 
the Participant's securities and settlement accounts result in 
corresponding changes in its Collateral Monitor.\13\ When processing a 
transaction, DTC verifies that the deliverers and receiver's Collateral 
Monitor will not become negative when the transaction is processed, and 
when under-collateralized, the transaction will remain in a pending 
status until the deficient account has sufficient collateral to allow 
for processing.\14\
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    \7\ The ``Collateral Monitor'' of a Participant refers to the 
algebraic sum of (i) the Net Credit or Debit Balance of the 
Participant and (ii) the aggregate Collateral Value of the 
Collateral of the Participant. See Rule 1 (definition of 
``Collateral Monitor''), supra note 4.
    \8\ See Disclosure Framework, supra note 5, at 54.
    \9\ The ``Net Debit Balance'' of a Participant is the amount by 
which the Gross Debit Balance of the Participant exceeds its Gross 
Credit Balance. See Rule 1 (definition of ``Net Debit Balance''), 
supra note 4. The ``Gross Debit Balance'' of a Participant refers to 
the aggregate amount of money DTC debits or charges to all the 
Accounts in all the Account Families of the Participant without 
accounting for any amount of money credited thereto. Id. (definition 
of ``Gross Debit Balance''). The ``Gross Credit Balance'' of a 
Participant refers to the aggregate amount of money DTC credits to 
all the Accounts in all the Account Families of the Participant 
without accounting for any amount of money debited or charged 
thereto. Id. (definition of ``Gross Credit Balance'').
    \10\ The ``Collateral'' of a Participant refers to the sum of 
(i) the Actual Participants Fund Deposit of the Participant, (ii) 
the Actual Preferred Stock Investment of a Participant, (iii) all 
Net Additions of the Participant and (iv) any SPP wired by the 
Participant to the Corporation. See id. (definition of 
``Collateral''); infra note 18.
    \11\ See Notice of Filing, supra note 3, at 89752.
    \12\ See Disclosure Framework, supra note 5, at 53.
    \13\ See id. at 54.
    \14\ See id.
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    The Net Debit Cap limits the Net Debit Balance that a Participant 
can incur, thus limiting any Participant's net debit settlement 
obligation to an amount that can be covered by DTC's liquidity 
resources at any point during DTC's processing day.\15\ Likewise, the 
Aggregate Affiliated Family Net Debit Cap limits the sum of Net Debit 
Balances of an Affiliated Family of Participants, provided that the 
maximum Aggregate Affiliated Family Net Debit Cap not exceed the total 
available liquidity resources of DTC.\16\ When a transaction would 
cause a Participant's Net Debit Balance to exceed its Net Debit Cap, it 
is not processed.\17\ Instead, the transaction remains in a pending 
status until the Participant's Net Debit Balance is sufficiently 
reduced to allow processing. The Net Debit Balance may be reduced 
during the processing day by, among other things, receipt of a Delivery 
Versus Payment, which generates credits to the Participant's settlement 
account, or by a Settlement Progress Payment (``SPP''), which are funds 
that may be wired to DTC \18\ for the Participant to prevent its Net 
Debit Cap from blocking its receipt of securities.
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    \15\ See Settlement Guide, supra note 4, at 6; definition of Net 
Debit Balance, supra note 9.
    \16\ ``Affiliated Family'' means each Participant that controls 
or is controlled by another Participant and each Participant that is 
under the common control of any Person, control meaning the direct 
or indirect ownership of more than 50% of the voting securities or 
other voting interests of any Person. See Rule 1 (definition of 
``Affiliated Family''), supra note 4. The ``Aggregate Affiliated 
Family Net Debit Cap'' means the sum of the Net Debit Caps for the 
Participants that are part of an Affiliated Family in the manner 
specified in the Procedures. Id. (definition of ``Aggregate 
Affiliated Family Net Debit Cap'').
    \17\ See Settlement Guide, supra note 4, at 62, 73-74.
    \18\ A SPP is Collateral that increases a Participant's 
Collateral Monitor, but also reduces a Participant's Net Debit 
Balance. See id. at 73.
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    According to DTC, its liquidity structure is designed to maintain 
sufficient financial resources to complete settlement each business 
day, even in the event of the failure to settle of a Participant, or 
Affiliated Family of Participants, with the largest settlement 
obligation.\19\ DTC calculates its liquidity needs per Participant at a 
legal entity level, and further aggregates these amounts for an 
Affiliated Family based on the assumption that all such affiliates may 
fail simultaneously.\20\ DTC states that its two key liquidity 
resources are: \(i)\ Required Participants Fund Deposits across all 
Participants of $1.15 billion, and (ii) a committed line of credit 
facility (``LOC'') of $1.9 billion, to which DTC may pledge Securities 
that are Collateral of the defaulting Participant in order to complete 
settlement.\21\ Together, the Participants Fund and LOC provide DTC 
with $3.05 billion in total liquidity resources.
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    \19\ See Notice of Filing, supra note 3, at 89752.
    \20\ Id. at 89754.
    \21\ See Settlement Guide, supra note 4, at 74.
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    As noted above, DTC sets both the maximum Net Debit Cap and the 
Aggregate Affiliated Family Net Debit Cap to an amount at or below 
DTC's liquidity resources.\22\ Currently, the Net Debit Cap for an 
individual Participant is $1.80 billion. The current Aggregate 
Affiliated Family Net Debit Cap is $2.85 billion, which DTC states is 
below DTC's total available liquidity resources to account for the 
possibility that a defaulting Participant that is part of an Affiliated 
Family may be a lender to the LOC.\23\
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    \22\ To determine a Participant's Net Debit Cap, DTC records the 
Participant's three highest intraday net debit peaks over a rolling 
70-Business Day period. The Participant's average of these net debit 
peaks is calculated and multiplied by a factor to determine the 
Participant's Net Debit Cap, but not to exceed $1.80 billion. See 
id. at 73. DTC increased the maximum Net Debit Cap for a Participant 
to $1.80 billion from $1.5 billion in 2001, to reduce processing 
blockages relating to increased trading volumes and settlement 
values, with this increase facilitated by a coinciding increase to 
DTC's liquidity resources. See Securities Exchange Act Release No. 
44509 (July 3, 2001), 66 FR 36350 (July 11, 2001) (File No. SR-DTC-
2001-09).
    \23\ See Notice of Filing, supra note 3, at 89753.
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III. Description of the Proposed Rule Change

    DTC proposes increasing the maximum Net Debit Cap from $1.8 billion 
to $2.15 billion. DTC states that Participants have requested that DTC 
raise the maximum Net Debit Cap to reduce transaction blockage and the 
need to make SPPs when reducing the Net Debit Balance during the 
processing day, allowing for less transactions in a

[[Page 8468]]

pending status because Participants may maintain a higher Net Debit 
Balance.\24\ Specifically, DTC proposes revising two references to the 
existing $1.80 billion Net Debit Cap for an individual Participant in 
the Settlement Guide to reflect the proposed $2.15 billion Net Debit 
Cap. DTC is not proposing a change to the current maximum Aggregate 
Affiliated Family Net Debit Cap of $2.85 billion.
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    \24\ See id.
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    DTC states that the proposed increase better aligns the maximum Net 
Debit Cap for an individual Participant with DTC's available liquidity 
resources.\25\ According to DTC, the proposed increase of $350 million 
to the Net Debit Cap is supported by qualifying liquid resources from 
the $450 million Core Fund to which all Participants contribute,\26\ 
and the $1.90 billion LOC, collectively providing $2.35 billion in 
liquidity resources.\27\ DTC states that this $200 million buffer 
between the $2.35 billion in liquidity resources and the proposed $2.15 
billion Net Debit Cap accounts for the possibility that a defaulted 
Participant may also be a lender to the LOC.\28\
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    \25\ See id.
    \26\ The aggregate Participants Fund includes four component 
amounts: the ``Core Fund,'' the ``Base Fund,'' the ``Incremental 
Fund,'' and the ``Liquidity Fund.'' The Core Fund, set by DTC at an 
aggregate amount of $450 million, is comprised of the Base Fund and 
the Incremental Fund. The Base Fund is the sum of minimum deposits 
by all Participants and equals the amount that is $7,500 times the 
number of Participants, at any time. The Incremental Fund is the 
balance of the Core Fund up to $450 million; this is the amount that 
must be ratably allocated among Participants that are required to 
pay more than a minimum deposit, as described in the Settlement 
Guide. The Liquidity Fund component (set at $700 million) applies to 
Participants whose Affiliated Families have Net Debit Caps that 
exceed $2.15 billion. See Settlement Guide, supra note 4, at 53-56.
    \27\ See Notice of Filing, supra note 3, at 89752. DTC states 
that the Liquidity Fund is not included because that amount only 
applies to Participants whose Affiliated Families have Net Debit 
Caps that exceed $2.15 billion. Id. at n.19.
    \28\ See id. at 89753. DTC explains that the $200 million buffer 
is an amount greater than the contribution of any lender to the DTC 
LOC. Id. at n.20.
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    DTC conducted an impact study for the period January 3, 2022, 
through December 30, 2022 (``Impact Study'').\29\ The Impact Study 
determined the liquidity needs across legal entities by looking at 
Participants reaching 90% of the current $1.80 billion maximum Net 
Debit Cap, identifying the transactions pending under Net Debit Cap 
limits, and any incoming SPPs. The Impact Study shows that a number of 
Participants currently capped at the $1.80 billion Net Debit Cap would 
realize an immediate benefit from the proposed Net Debit Cap increase 
since the increase would enable more transactions to process without 
the need for a Participant to wait to reduce its intraday Net Debit 
Balance through Delivery Versus Payment credits or SPPs, therefore 
improving transaction processing.
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    \29\ As part of the Proposed Rule Change, DTC filed, as Exhibit 
3, the Impact Study. Pursuant to 17 CFR 240.24b-2, DTC requested 
confidential treatment of Exhibit 3.
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IV. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \30\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Act and rules and regulations thereunder applicable 
to such organization. After careful review of the Proposed Rule Change, 
the Commission finds that the Proposed Rule Change is consistent with 
the requirements of the Act and the rules and regulations thereunder 
applicable to DTC. In particular, the Commission finds that the 
Proposed Rule Change is consistent with Section 17A(b)(3)(F) of the Act 
\31\ and Rule 17Ad-22(e)(7)(i) thereunder.\32\
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    \30\ 15 U.S.C. 78s(b)(2)(C).
    \31\ 15 U.S.C. 78q-1(b)(3)(F).
    \32\ 17 CFR 240.17Ad-22(e)(7)(i).
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A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act requires that the rules of a 
clearing agency, such as DTC, be designed to, among other things, 
promote the prompt and accurate clearance and settlement of securities 
transactions.\33\ The Commission believes that the Proposed Rule Change 
is consistent with Section 17A(b)(3)(F) of the Act for the reasons 
stated below.
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    \33\ 15 U.S.C. 78q-1(b)(3)(F).
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    As discussed in Part II, DTC uses the Net Debit Cap as a risk 
management control to protect the DTC settlement system in the event of 
a Participant default, by limiting the settlement net debit any 
Participant can incur at any point during the processing day to an 
amount below DTC's liquidity resources. This ensures that DTC maintains 
sufficient financial resources to complete settlement in the event of a 
failure to settle by the largest Participant or Affiliated Family of 
Participants.
    Because DTC does not process transactions that would result in a 
Participant exceeding its Net Debit Cap and these remain as pending 
until the Participant's Net Debit Balance is reduced to where it would 
no longer exceed it, increasing the Net Debit Cap would allow more 
transactions to process without the need for a Participant to wait for 
a reduction of its intraday Net Debit Balance. The Commission has 
reviewed and analyzed the filing materials, including the Impact Study, 
and agrees that there are a number of Participants that would 
immediately benefit from the proposed increase by seeing less of its 
transactions pend because the Participant may maintain a higher Net 
Debit Cap.
    As discussed in Parts II and III, the proposed Net Debit Cap 
increase would continue to be supported by sufficient DTC qualifying 
liquid resources, since the proposed increase to a $2.15 billion Net 
Debit Cap continues to be below the $2.35 billion in liquidity 
resources that the $450 million Core Fund and the $1.90 billion LOC 
collectively provide. Because the increase in Net Debit Cap should 
improve transaction processing while still being covered by DTC 
liquidity resources in the event of default, the Commission finds that 
the Proposed Rule Change should enhance DTC's ability to provide prompt 
and accurate clearance and settlement of securities transactions, 
consistent with Section 17A(b)(3)(F) of the Act.

B. Consistency With Rule 17Ad-22(e)(7)(i)

    Rule 17Ad-22(e)(7)(i) requires that, among other things, DTC 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to, as applicable, effectively measure, 
monitor, and manage the liquidity risk that arises in or is borne by 
the covered clearing agency, including measuring, monitoring, and 
managing its settlement and funding flows on an ongoing and timely 
basis, and its use of intraday liquidity by maintaining sufficient 
liquid resources at the minimum in all relevant currencies to effect 
same-day, and, where appropriate, intraday and multiday settlement of 
payment obligations with a high degree of confidence under a wide range 
of foreseeable stress scenarios, that includes, but is not limited to, 
the default of the participant family that would generate the largest 
aggregate payment obligation for DTC in extreme but plausible market 
conditions.\34\
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    \34\ 17 CFR 240.17Ad-22(e)(7)(i).
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    As discussed in Part II, DTC monitors settlement flows and net 
debit obligations daily, and employs the Net Debit Cap, among other 
tools, to allow it to regularly test the sufficiency of liquid 
resources on an intraday and end-of-day basis and adjust to stressed 
circumstances during a settlement day

[[Page 8469]]

to protect itself and Participants against liquidity exposure under 
normal and stressed market conditions. Specifically, the Net Debit Cap 
limits a Participant's net debit settlement obligation to an amount 
that can be satisfied with DTC liquidity resources at any point during 
DTC's processing day. As discussed in Part III, the proposed increase 
in Net Debit Cap from $1.80 billion to $2.15 billion would continue to 
be below DTC's available qualifying liquid resources when considering 
the Core Fund and LOC collectively, and it would not otherwise alter 
the way DTC monitors settlement flows and net debit obligations. 
Additionally, as discussed in Part III, the proposed increase continues 
to provide a buffer between the liquidity resources and the proposed 
$2.15 billion Net Debit Cap that accounts for the possibility that a 
defaulting Participant may also be a lender to the LOC. This should 
allow DTC to continue to have sufficient liquid resources even when the 
defaulting Participant is a lender to the LOC.
    For the reasons above, the Commission finds that the Proposed Rule 
Change is consistent with Rule 17Ad-22(e)(7)(i) under the Act \35\ 
because the proposed Net Debit Cap increase would allow DTC to continue 
to manage liquidity risks by maintaining sufficient liquid resources to 
settle its payment obligations under a wide range of foreseeable stress 
scenarios, including the default of the participant family that would 
generate the largest aggregate payment obligation for DTC in extreme 
but plausible market conditions.
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    \35\ Id.
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V. Conclusion

    On the basis of the foregoing, the Commission finds that the 
Proposed Rule Change is consistent with the requirements of the Act, 
and in particular, with the requirements of Section 17A of the Act \36\ 
and the rules and regulations promulgated thereunder.
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    \36\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\37\ that proposed rule change SR-DTC-2023-013, be, and hereby is, 
APPROVED.\38\
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    \37\ 15 U.S.C. 78s(b)(2).
    \38\ In approving the Proposed Rule Change, the Commission 
considered its impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\39\
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    \39\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-02420 Filed 2-6-24; 8:45 am]
BILLING CODE 8011-01-P
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