Document ID: SEC-2014-1182-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Depository Trust Co.
Posted Date: 2014-07-15T04:00Z

[Federal Register Volume 79, Number 135 (Tuesday, July 15, 2014)]
[Notices]
[Pages 41335-41337]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-16502]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72576; File No. SR-DTC-2014-06]

Self-Regulatory Organizations; The Depository Trust Company; 
Order Approving Proposed Rule Change To Modify the Receiver Authorized 
Deliver and Reclaim Processing Value Limits by Transaction

July 9, 2014.

I. Introduction

    On May 30, 2014, The Depository Trust Company (``DTC'') filed with 
the Securities and Exchange Commission (``Commission'') proposed rule 
change SR-DTC-2014-06 (``Proposed Rule Change'') pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934

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(``Act'') \1\ and Rule 19b-4 thereunder.\2\ The Proposed Rule Change 
was published for comment in the Federal Register on June 5, 2014.\3\ 
The Commission did not receive any comments on the Proposed Rule 
Change. This order approves the Proposed Rule Change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 72283 (May 30, 2014), 79 
FR 32599 (June 5, 2014).
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II. Description

    DTC filed the Proposed Rule Change to modify its Rules, By-Laws, 
and Organization Certificate (``Rules'') to lower limits against which 
valued Deliver Orders (``DOs'') and Payment Orders (``POs'') \4\ will 
be required to be accepted for receipt (i.e., ``matched'' for 
settlement) via DTC's Receiver Authorized Delivery (``RAD'') process. 
With the Proposed Rule Change, DTC seeks to reduce the intraday 
uncertainty that may arise from reclaim transactions linked to DOs and 
POs and any potential credit and liquidity risk from such transactions.
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    \4\ A DO is a book-entry movement of a particular security 
between two DTC participants (``Participants''). A PO is a method 
for settling funds related to transactions and payments not 
associated with a DO. For purposes of this Proposed Rule Change, the 
defined term ``DOs'' includes all valued DOs except for DOs of: (i) 
Money Market Instruments (``MMI'') and (ii) institutional delivery 
(``ID'') transactions affirmed through Omgeo, both of which are not 
impacted by the Proposed Rule Change.
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    Currently, as set forth in the DTC Settlement Service Guide 
(``Guide''), valued DOs and POs, excluding DOs of MMIs and ID 
transactions, in amounts above $7.5 million and $500,000, respectively, 
are subject to the RAD process, which allows a receiver of DOs and/or 
POs (``Receiver'') to review and reject transactions that it does not 
recognize prior to DTC's processing of the transaction.\5\ In contrast, 
lower valued DOs and POs do not require the Receiver's acceptance prior 
to processing. Instead, if the Receiver does not recognize a DO or PO 
it has received, the DO or PO may be returned by the Receiver to the 
original deliverer of the DO or PO (``Deliverer'') in a reclaim 
transaction (``Reclaim''). While both the Reclaim and RAD 
functionalities allow a Receiver to exercise control over which 
transactions to accept, Reclaims tend to create uncertainty because 
transactions may be returned late in the day, when the Deliverer may 
have limited options to respond. Because Reclaims are permitted without 
regard to DTC's risk management controls, a Deliverer that is subject 
to a Reclaim may incur a greater settlement obligation than otherwise 
anticipated, increasing credit and liquidity risk to the Deliverer and 
to DTC.\6\
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    \5\ In 2013, DTC took an initial step to address this 
uncertainty by lowering the RAD threshold over which transactions 
must be matched for DOs and POs from $15 million and $1 million, 
respectively, to the current limits mentioned above. Securities 
Exchange Act Release No. 69985 (July 12, 2013); 78 FR 42991 (July 
18, 2013) (SR-DTC-2013-04).
    \6\ DTC's risk management controls, including Collateral Monitor 
and Net Debit Cap, are designed so that DTC can effect system-wide 
settlement notwithstanding the failure to settle of the largest DTC 
Participant or affiliated family of Participants. The Collateral 
Monitor tests that a Participant has adequate collateral to secure 
the amount of its net debit balance so that DTC may borrow funds to 
cover that amount for system-wide settlement if the Participant 
defaults. See DTC Rules, http://dtcc.com/~/media/Files/Downloads/
legal/rules/dtc--rules.ashx. The Net Debit Cap limits the net debit 
balance a Participant can incur so that the unpaid settlement 
obligation of the Participant, if any, cannot exceed available DTC 
liquidity resources. Id.
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    Pursuant to the Proposed Rule Change, DTC will revise the Guide to 
reflect that: (i) With respect to valued DOs, DTC will lower the RAD 
threshold to $.01 via a three-phase reduction as described below, and 
(ii) with respect to POs, DTC will reduce the RAD threshold to zero 
immediately upon implementation of the Proposed Rule Change. As such, 
in the first phase of implementation of the Proposed Rule Change, DTC 
will reduce the RAD threshold for DOs to $100,000. In the second phase, 
the RAD threshold for valued DOs will be reduced to $20,000. In the 
third phase, the RAD threshold for DOs will be reduced to $.01. In 
addition, to further promote finality of settlement, new issues will no 
longer be exempt from RAD.
    Also, the Guide will be updated to reflect that certain DO and PO 
functions will no longer be accessible through DTC's Participant 
Terminal System. Instead, such functions will be accessible through a 
DTC web application known as ``Settlement Web.'' Further, the Guide 
will be updated via a technical change to clarify that the RAD 
threshold for institutional transactions remains at $15 million, rather 
than at the $7.5 million amount currently in effect for non-
institutional transactions. Finally, the Guide will be revised to 
remove a provision that overvalued deliveries are automatically routed 
to RAD, as this section will become redundant upon implementation of 
the Proposed Rule Change since all DOs will be subject to RAD.
    The effective date of the Proposed Rule Change, including the dates 
of the implementation phases described above, will be announced via a 
DTC Important Notice.\7\
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    \7\ For purposes of taking into account the incremental 
implementation of the Proposed Rule Change as described above, 
beginning on an implementation date that shall be announced via DTC 
Important Notice (``Initial Implementation Date'') DTC will lower 
the RAD limit for non-institutional DOs to $100,000 and POs to zero. 
From a date that is approximately two weeks following the Initial 
Implementation Date and that shall be announced by Important Notice, 
until a date that is approximately six weeks following the Initial 
Implementation Date and that shall be announced by Important Notice, 
DTC will lower the RAD limit for non-institutional DOs to $20,000. 
From a date that is approximately six weeks following the Initial 
Implementation Date and that shall be announced by Important Notice, 
DTC will lower the RAD limit for non-institutional DOs to $.01.
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III. Discussion

    Section 19(b)(2)(C) of the Act \8\ 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. Section 17A(b)(3)(F) of the Act requires, among 
other things, that the rules of a clearing agency be designed to 
promote the prompt and accurate clearance and settlement of securities 
transactions.\9\ In addition, Rule 17Ad-22(d)(12) of the Act requires 
that a clearing agency establish, implement, maintain and enforce 
written policies and procedures reasonably designed to ensure that 
final settlement occurs no later than the end of the settlement day and 
require that intraday or real-time finality be provided where necessary 
to reduce risks.\10\
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    \8\ 15 U.S.C. 78s(b)(2)(C).
    \9\ 15 U.S.C. 78q-1(b)(3)(F).
    \10\ 17 CFR 240.17Ad-22(d)(12).
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    The Commission finds the Proposed Rule Change is consistent with 
the Act. More specifically, as the Proposed Rule Change pertains to the 
lower RAD threshold for non-institutional transactions, the resulting 
limit on Reclaim transactions, and the removal of the new issue 
exemption, the Commission finds that the Proposed Rule Change is 
consistent with Section 17A(b)(3)(F) of the Act \11\ because it will 
increase the number of deliveries that will require Receiver approval 
prior to DTC processing, which reduces the intraday uncertainty and 
associated risks that may arise from Reclaims, thus facilitating the 
prompt and accurate clearance and settlement of securities 
transactions. The Commission also finds these aspects of the Proposed 
Rule Change consistent with Rule 17Ad-22(d)(12) of the Act \12\ because 
more

[[Page 41337]]

transactions will be subject to DTC's risk management controls, which 
helps ensure that final settlement occurs no later than the end of the 
settlement day.
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    \11\ 15 U.S.C. 78q-1(b)(3)(F).
    \12\ 17 CFR 240.17Ad-22(d)(12).
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    Additionally, the Commission finds the Proposed Rule Change, as it 
pertains to changes to DTC's Participant Terminal System and Settlement 
Web services, the RAD threshold for institutional transactions, and 
overvalued deliveries, consistent with both Section 17A(b)(3)(F) of the 
Act \13\ and Rule 17Ad-22(d)(12) of the Act \14\ because specifying the 
application through which Participants may access certain settlement 
functions, clarifying the RAD threshold of institutional transactions, 
and eliminating redundant provisions promotes the prompt and accurate 
clearance and settlement of securities transactions and improves DTC's 
written policies and procedures that are designed to ensure final 
settlement no later than the end of the settlement day.
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    \13\ 15 U.S.C. 78q-1(b)(3)(F).
    \14\ 17 CFR 240.17Ad-22(d)(12).
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IV. 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 \15\ and 
the rules and regulations thereunder.
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    \15\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that proposed rule change SR-DTC-2014-06 be, and hereby is, 
approved.\16\
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    \16\ 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).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-16502 Filed 7-14-14; 8:45 am]
BILLING CODE 8011-01-P