Document ID: SEC-2012-0696-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Depository Trust Company
Posted Date: 2012-05-07T04:00Z

[Federal Register Volume 77, Number 88 (Monday, May 7, 2012)]
[Notices]
[Pages 26796-26798]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-10911]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66894; File No. SR-DTC-2012-03]

Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing of Proposed Rule Change To Implement a Change in the 
Practices of The Depository Trust Company as They Relate to Post-
Payable Adjustments

May 1, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on April 25, 2012, The Depository Trust Company (``DTC'') filed with 
the Securities and Exchange Commission (``Commission'') the proposed 
rule change as described in Items I and II below, which Items have been 
prepared primarily by DTC.

[[Page 26797]]

The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The purpose of the proposed rule change is to implement a change in 
the practices of DTC as they relate to post-payable adjustments of 
principal and income payments (``P&I'').\3\
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    \3\ In addition, DTC is updating its Operational Arrangements 
with a clarification regarding notifications.
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, DTC included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. DTC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of these 
statements.\4\
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    \4\ The Commission has modified the text of the summaries 
prepared by DTC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    (i) Historically, DTC has accommodated issuers and/or their agents 
(``Paying Agents'') by facilitating the collection and in many cases 
the reallocation of certain misapplied, misdirected, or miscalculated 
P&I.\5\ Under today's practices, DTC will process requests for these 
types of post-payable adjustments up to one year after the initial 
payment is made. Subject to Commission approval, effective November 1, 
2012, DTC will no longer accommodate Paying Agent requests to process 
these types of post-payable adjustments beyond 60 calendar days after 
the initial payment date. This change in practice will allocate 
assignment of accountability appropriately and will mitigate the risk 
associated with the reallocation of such principal and income payments.
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    \5\ P&I include Principal Pass-Thru payments, Full Calls, 
Partial Calls, Maturities, Pre-Refundings and all interest and 
dividend payments.
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Background
    Several years ago, DTC formed a cross-industry working group to 
study the severity of P&I processing problems and to analyze possible 
solutions. The working group at that time focused mainly on the 
timeliness of rate information submitted to DTC by paying agents and 
recommended several changes to DTC's Operational Arrangements. Those 
changes were approved by the Commission and implemented in 2008 (``2008 
changes'').\6\ Implementation of the 2008 changes resulted in a 75% 
decrease in late rate information and a significant increase in the 
allocation of P&I on payment date. More recently, the working group has 
suggested that, among other things, DTC create a time limit for 
processing post-payable adjustments received from Paying Agents.
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    \6\ Securities Exchange Act Release Number 34-57542 (March 20, 
2008), 73 FR 16403 (March 27, 2008).
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    Under current practice, DTC processes post-payable adjustments 
received from Paying Agents up to one year after the initial payment is 
made. After DTC processes the debits and credits for the misapplied 
P&I, DTC participants must process trade adjustments against any 
customer who traded the security since the error occurred. Participants 
must also process adjustments to their customers' accounts for the 
misapplied principal and associated interest. DTC has been requested a 
number of times by the Association of Global Custodians to focus more 
closely on the risks associated with income adjustments and to look for 
ways to reduce that risk.\7\
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    \7\ In fact, the Association of Global Custodians' 
recommendation was to adopt a new practice in which DTC would state 
that: (i) Misapplied, misdirected, or miscalculated principal 
payments must be reversed within two business days after the initial 
payment; and (ii) misapplied, misdirected, or miscalculated interest 
payments and cash dividend payments must be reversed within seven 
business days after payment. However, at this time, DTC is 
establishing an interim policy, which will put it closer to such an 
end state.
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    In an effort to further reduce the inherent risks associated with 
these types of post-payable adjustments and to compel all parties in 
the payment chain to confront and minimize the challenges associated 
with principal and income adjustments, subject to Commission approval 
effective November 1, 2012, DTC will implement a practice whereby no 
adjustments for P&I will be accepted or processed by DTC from Paying 
Agents beyond 60 calendar days from the initial payment date. This 
practice will apply to all security types. DTC will continue to 
accommodate Paying Agents by facilitating the collection and in many 
cases the reallocation of certain misapplied, misdirected, or 
miscalculated P&I on all security types where the adjustments are 
within sixty calendar days from payment date. Issuers and Agents 
wishing to modify certain principal and income payments beyond sixty 
calendar days may do so by obtaining a ``P&I Allocation Register'' and 
making adjustments and payment arrangements directly with the affected 
DTC Participants.
    (ii) The proposed rule change is consistent with the provisions of 
the Act, and the rules and regulations thereunder applicable to DTC and 
in particular to Section 17A(b)(3)(F) \8\ because limiting the 
ambiguity surrounding payment finality will help DTC remove impediments 
to and perfect the mechanism of a national system for the prompt and 
accurate clearance and settlement of securities transactions.
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    \8\ 15 U.S.C. 78g-1(b)(3)(F).
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    DTC does not believe that the proposed rule change will have any 
impact or impose any burden on competition.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants or Others

    Written comments relating to the proposed rule change have not been 
solicited or received. DTC will notify the Commission of any written 
comments received by DTC.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

[[Page 26798]]

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml) or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-DTC-2012-03 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-DTC-2012-03. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Section, 100 F Street 
NE., Washington, DC 20549, on official business days between the hours 
of 10:00 a.m. and 3:00 p.m. Copies of such filings will also be 
available for inspection and copying at the principal office of DTC and 
on DTC's Web site at http://www.dtcc.com/downloads/legal/rule_filings/2012/dtc/2012-03.pdf.
    All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-DTC-2012-03 
and should be submitted on or before May 29, 2012.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Kevin O'Neill,
Deputy Secretary.
[FR Doc. 2012-10911 Filed 5-4-12; 8:45 am]
BILLING CODE 8011-01-P