[Federal Register Volume 89, Number 215 (Wednesday, November 6, 2024)]
[Notices]
[Pages 88078-88080]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-25726]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-101486; File No. SR-DTC-2024-010]


Self-Regulatory Organizations; The Depository Trust Company; 
Order Approving of Proposed Rule Change To Decommission the ID Net 
Service

October 31, 2024.

I. Introduction

    On September 12, 2024, The Depository Trust Company (``DTC'') filed 
with the Securities and Exchange Commission (``Commission'') proposed 
rule change SR-DTC-2024-010 (``Proposed Rule Change'') pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ 
and Rule 19b-4 thereunder,\2\ to decommission the ID Net service (``ID 
Net Service'' or ``ID Net'').\3\ The Proposed Rule Change was published 
for comment in the Federal Register on September 27, 2024.\4\ The 
Commission has received no comments on the Proposed Rule Change. For 
the reasons discussed below, the Commission is approving the Proposed 
Rule Change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 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.
    \4\ See Securities Exchange Act Release No. 101132 (Sept. 23, 
2024), 89 FR 79320 (Sept. 27, 2024) (File No. SR-DTC-2024-010) 
(``Notice of Filing'').
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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\ The ID Net Service is a joint 
service offering of DTC and its affiliate, National Securities Clearing 
Corporation (``NSCC''), available on a voluntary basis to broker/
dealers that are participants of both NSCC and DTC and banks that are 
participants of DTC.\6\ ID Net allows broker/dealer users to net their 
affirmed institutional transactions (``Affirmed Transactions'') with 
their transactions in NSCC's Continuous Net Settlement

[[Page 88079]]

(``CNS'') system.\7\ An institutional transaction is one between a 
broker/dealer and its institutional customer. Such institutional 
customers are not Participants of DTC. Unlike exchange trades and most 
prime broker trades, most institutional delivery transactions do not 
currently flow through CNS but instead settle at DTC on a trade-for-
trade basis.\8\ DTC may accept Affirmed Transactions submitted by a 
utility that provides a matching service (``Matching Utility'').\9\ The 
counterparties on an Affirmed Transaction submitted by a Matching 
Utility to DTC are a (i) DTC Participant, acting as clearing broker to 
the Affirmed Transaction and a (ii) DTC Participant bank, acting as the 
custodian for an institutional customer. The Affirmed Transaction is 
processed on a trade-for-trade basis at DTC, unless it is designated 
for ID Net processing by the Matching Utility and meets certain 
eligibility requirements.
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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\ NSCC also filed a proposed rule change with the Commission 
in connection with decommissioning the ID Net Service. See 
Securities Exchange Act Release No. 101131 (Sept. 23, 2024), 89 FR 
79324 (Sept. 27, 2024) (File No. SR-NSCC-2024-008).
    \7\ CNS is NSCC's system for accounting and settling CNS-
eligible securities. See NSCC Rule 11 (describing the CNS System) 
and Procedure VII (describing the CNS Accounting Operation), 
available at www.dtcc.com/-/media/Files/Downloads/legal/rules/nscc_rules.pdf. To be CNS-eligible, a security must be eligible for 
book-entry transfer on the books of DTC and must be capable of being 
processed in the CNS system. All eligible compared and recorded 
transactions for a particular settlement date are netted by issue 
into one net long (buy), net short (sell) or flat position for each 
Member, and those positions are further netted with positions of the 
same issue that remain open after their originally scheduled 
settlement date. As central counterparty, NSCC becomes the contra-
party for settlement purposes, assuming the obligation of its 
Members that are receiving securities to receive and pay for those 
securities and the obligation of Members that are delivering 
securities to make the delivery. CNS netting thus reduces the number 
of securities movements required to settle transactions.
    \8\ See DTC Settlement Guide, supra note 3.
    \9\ The Matching Utility must be (i) a clearing agency 
registered with the Commission, (ii) an entity that has obtained an 
exemption from such registration from the Commission, or (iii) a 
``qualified vendor'' for trade confirmation/affirmation services as 
defined by the rules of a self-regulatory organization. See DTC 
Settlement Guide, supra note 3, at 40. TCC ITP Matching (US) LLC 
(``ITP''), a DTC and NSCC affiliate, is currently the only Matching 
Utility that submits Affirmed Transactions to DTC. See Notice of 
Filing, supra note 4, at 79320 n.8.
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    In order for an Affirmed Transaction to be eligible for processing 
in ID Net, (i) both counterparties to the Affirmed Transaction must be 
a Member of NSCC and a Participant of DTC, or a bank that is a 
Participant of DTC, that has subscribed to ID Net; and (ii) the 
transaction must be (a) in a security eligible for processing through 
NSCC's CNS and (b) affirmed within established timeframes set forth in 
the Settlement Guide.\10\
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    \10\ See Settlement Guide, supra note 3, at 40-41.
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    If an Affirmed Transaction is designated for ID Net and meets the 
eligibility criteria, then DTC will direct the transaction to ID Net, 
which facilitates the netting of a broker/dealer's side of an Affirmed 
Transaction with that broker/dealer's CNS activity, via omnibus 
accounts that are maintained by NSCC at DTC and designated for ID Net 
activity. If a bank is a counterparty to the ID Net-eligible Affirmed 
Transaction, then it will either receive or deliver the subject shares 
versus payment, on a trade-for-trade basis, via the ID Net omnibus 
accounts.
    While ID Net allows broker/dealers to realize the benefit of 
netting for Affirmed Transactions by allowing the broker/dealer to net 
its ID Net-eligible Affirmed Transactions with its transactions in CNS, 
banks using ID Net settle ID Net transactions on a trade-for-trade 
basis as they would for other Affirmed Transactions. In this regard, 
DTC states that ID Net's main benefit is to streamline clearance and 
settlement of ID Net-eligible Affirmed Transactions for broker/
dealers.\11\
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    \11\ See Notice of Filing, supra note 4, at 79321.
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III. Description of the Proposed Rule Change

    DTC states that as part of DTC's and NSCC's continuous evaluations 
to the efficiency and effectiveness of the services they provide and in 
order to streamline and simplify their services and processes, DTC and 
NSCC have identified ID Net as an underused service that may be 
eliminated as part of modernization efforts.\12\ They each propose to 
decommission the ID Net Service due to factors including: (i) limited 
uptake and usage of the service since its adoption; and (ii) the 
operational complexity of maintaining the service, which also connects 
with and impacts other core clearance and settlement processes.\13\
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    \12\ Id.
    \13\ DTC states that this complexity includes (i) special 
eligibility checks versus the ID Net eligibility criteria and (ii) 
leveraging of the omnibus accounts to simultaneously allow (a) a 
bank to process ID Net-eligible transactions on a trade-for-trade 
basis and (b) the broker/dealer side of an ID Net-eligible 
transaction to settle via CNS. Notice of Filing, supra note 4, at 
79321 n.12.
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    To implement the proposed change, DTC proposes removing all 
provisions relating to ID Net from the Settlement Guide, including (i) 
the entire text of the section titled ``ID Net,'' which contains the 
DTC Procedures for processing of ID Net transactions,\14\ and (ii) a 
reference to ID Net relating to messaging in the section titled 
``Affirmed Transactions.'' \15\
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    \14\ See Settlement Guide, supra note 3, at 40-46.
    \15\ Id. at 38.
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    In addition, DTC proposes removing the associated ID Net Fee of 2 
cents per transaction from the Guide to the DTC Fee Schedule (``Fee 
Guide'') \16\ because the fee would be obsolete without the ID Net 
Service. Instead, such transactions would, by default, be charged the 
standard fee charged for Affirmed Transactions of 4 cents per 
transaction.\17\
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    \16\ See Fee Guide, available at www.dtcc.com/~/media/Files/
Downloads/legal/fee-guides/DTC-Fee-Schedule.pdf.
    \17\ Id.
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    DTC believes that the decommission of the ID Net Service would have 
minimal impact on its Participants, as only 13 broker/dealers and 20 
banks are subscribed to the ID Net Service and the service is not used 
by all of those broker/dealers and banks.\18\ Furthermore, without ID 
Net, Affirmed Transactions can simply settle trade-for-trade, directly 
between the counterparties like they already do.
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    \18\ DTC states that ID Net-related transactions currently 
comprise less than 1 percent of all activity processed by CNS. DTC 
believes that ID Net usage has been limited since its implementation 
in 2008 because, in part, the service needs both parties to an ID 
Net transaction to be subscribers of ID Net, which is not always the 
case. See Notice of Filing, supra note 4, at 79321 n.11.
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    DTC states that it has performed direct outreach to Participants 
that use the ID Net Service and has also announced its plans to 
decommission the ID Net Service in an Important Notice, and that there 
have been no material objections or concerns raised by 
Participants.\19\
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    \19\ See Notice of Filing, supra note 4, at 79321; see also DTC 
Important Notice regarding decommission of the ID Net Service, 
available at https://www.dtcc.com/-/media/Files/pdf/2023/8/8/18852-23.pdf.
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IV. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \20\ 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.\21\
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    \20\ 15 U.S.C. 78s(b)(2)(C).
    \21\ 15 U.S.C. 78q-1(b)(3)(F).
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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

[[Page 88080]]

agency, such as DTC, be designed to, among other things, promote the 
prompt and accurate clearance and settlement of securities 
transactions.\22\ 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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    \22\ Id.
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    The Proposed Rule Change would amend the Settlement Guide to 
reflect the decommission of ID Net and remove the ID Net Fee from the 
Fee Guide. As discussed in Parts II and III, ID Net is an underused 
service that is operationally complex to maintain, and its main benefit 
is to broker/dealers' streamline clearance and settlement of ID Net-
eligible Affirmed Transactions, which may otherwise settle on a trade-
for-trade basis. As such, ID Net's decommission would have minimal 
impact on DTC and its Participants considering its limited usage. 
Affirmed Transactions that would have otherwise been directed to ID Net 
will settle trade-for-trade directly between counterparties, like most 
other Affirmed Transactions currently do. Therefore, these transactions 
will continue to settle promptly and accurately, as other Affirmed 
Transactions do, outside of the ID Net Service. For these reasons, the 
Commission finds that the Proposed Rule Change should continue to 
support DTC's ability to provide prompt and accurate clearance and 
settlement of securities transactions, consistent with Section 
17A(b)(3)(F) of the Act.\23\
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    \23\ 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 \24\ 
and the rules and regulations promulgated thereunder.
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    \24\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\25\ that proposed rule change SR-DTC-2024-010, be, and hereby is, 
approved.\26\
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    \25\ 15 U.S.C. 78s(b)(2).
    \26\ 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.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-25726 Filed 11-5-24; 8:45 am]
BILLING CODE 8011-01-P