Document ID: SEC-2016-0108-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Depository Trust Co.
Posted Date: 2016-01-20T05:00Z

[Federal Register Volume 81, Number 12 (Wednesday, January 20, 2016)]
[Notices]
[Pages 3218-3220]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-00898]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76887; File No. SR-DTC-2015-011]

Self-Regulatory Organizations; The Depository Trust Company; 
Order Approving Proposed Rule Change Regarding the Acknowledgment of 
End-of-Day Net-Net Settlement Balances by Settling Banks

January 13, 2016.
    On November 16, 2015, The Depository Trust Company (``DTC'') filed 
with the Securities and Exchange Commission (``Commission'') proposed 
rule change SR-DTC-2015-011 pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ to amend DTC's Settlement Service Guide (``Guide'') \3\ 
in order to establish a new practice whereby any Settling Bank \4\ that 
(i) fails to affirmatively acknowledge its end-of-day net-net 
settlement balance,\5\ or (ii) does not notify DTC of its refusal to 
settle on behalf of a Participant or Participants for which it is the 
designated Settling Bank will be deemed to have acknowledged its end-
of-day net-net settlement balance and to make related technical changes 
and corrections to the Rules, as more fully described below. The 
proposed rule change was published for comment in the Federal Register 
on November 30, 2015.\6\ The Commission did not receive any comment 
letters on the proposed rule change. For the reasons discussed below, 
the Commission is granting approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Available at http://www.dtcc.com/~/media/Files/Downloads/
legal/service-guides/Settlement.pdf for an overview of the end-of-
day net settlement process.
    \4\ A ``Settling Bank'' is a DTC participant (``Participant'') 
that is a bank and that settles for itself and may settle for other 
Participants, including other bank Participants.
    \5\ The end-of-day net-net figure is the net of all 
Participants' net balances after cross-endorsement with the National 
Securities Clearing Corporation for which a Settling Bank settles, 
including its own accounts.
    \6\ See Securities Exchange Act Release No. 76510 (November 23, 
2015), 80 FR 74819 (November 30, 2015) (SR-DTC-2015-011).
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I. Description of the Proposed Rule Change

    The following is a description of the proposed rule change, as 
provided by DTC:
    Background. The DTC \7\ end-of-day net settlement structure depends 
upon the use of Settling Banks.\8\ Each Participant must designate a 
Settling Bank to settle on its behalf. Any Participant that is a bank 
may settle for itself.\9\ Today, a Settling Bank that settles for other 
Participants must acknowledge its end-of-day net-net settlement balance 
for the group of Participants for which it settles, or notify DTC if it 
refuses to settle for any Participant for which it is the designated 
Settling Bank, by the later of 4:15 p.m. and the time that is 30 
minutes after the Settling Bank end-of-day net-net settlement balances 
are first made available by DTC (``Acknowledgment Cutoff Time'').\10\
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    \7\ Terms not otherwise defined herein have the meaning set 
forth in the DTC Rules (the ``Rules''), available at http://www.dtcc.com/legal/rules-and-procedures.aspx.
    \8\ See the Guide, supra note 3, pp. 17-18.
    \9\ See Rule 9(B), supra note 7.
    \10\ Currently, a Settling Bank that settles only for itself may 
opt out of the requirement to acknowledge its balance, but it cannot 
refuse to settle for itself.
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    If a Settling Bank notifies DTC that it refuses to settle for a 
Participant, DTC would recalculate the Settling Bank's net-net 
settlement balance by excluding the net settlement balance of the 
Participant for which the Settling Bank refused to settle.\11\ DTC 
would then provide the Settling Bank with its adjusted net-net 
settlement balance (``Post-Refusal Adjusted Balance''). The Settling 
Bank may not refuse to settle for any other Participant on that day and 
must immediately respond to DTC to

[[Page 3219]]

acknowledge its Post-Refusal Adjusted Balance.
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    \11\ Any Participant for which its designated Settling Bank has 
refused to settle on its behalf remains obligated to DTC for the 
payment of any net debit balance and must make another arrangement 
to timely pay that amount by Fedwire.
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    After the Acknowledgment Cutoff Time and any adjustments, DTC will 
prepare and submit to the National Settlement Service (``NSS'') 
provided by the Federal Reserve Banks (individually and collectively, 
the ``Fed'') a file (``NSS File'') reflecting the net debits or credits 
from and to all Settling Banks. NSS will process a debit or credit of 
each Settling Bank's Fed account (``Fed Account''), as applicable.\12\
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    \12\ The Guide currently provides that if NSS is unavailable 
then, if instructed by DTC, Settling Banks in a net-net debit 
balance must remit payments to DTC via Fedwire by the later of 5:00 
p.m. or 1 hour after net settlement balances are first made 
available. This provision will be clarified to note an operational 
detail that all such payments must be remitted prior to the close of 
Fedwire.
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    Today, failure of a Settling Bank to timely respond to DTC after 
posting of final settlement figures creates uncertainty with respect to 
timely completion of settlement at DTC. The proposed rule change will 
address this issue as discussed below.
    Proposal. To promote settlement certainty, DTC has proposed to 
treat a Settling Bank that fails to timely provide its affirmative 
acknowledgement of its end-of-day net-net settlement balance or notify 
DTC of its refusal to settle for one or more Participants for which it 
is the designated Settling Bank, as having been deemed to acknowledge 
its end-of-day net-net settlement balance.
    DTC has proposed to modify the Guide to provide that a Settling 
Bank that (i) fails to affirmatively acknowledge its end-of-day net-net 
settlement balance, or (ii) does not notify DTC of its refusal to 
settle on behalf of a Participant or Participants for which it is the 
designated Settling Bank, by the Acknowledgement Cutoff Time, will be 
deemed to have acknowledged its end-of-day net-net settlement 
balance.\13\ The Settling Bank's balance will then, in the ordinary 
course of settlement processing, be debited from or credited to its Fed 
Account through the NSS process. Likewise, DTC has proposed that the 
Guide provide that a Settling Bank that fails to acknowledge 
immediately upon receipt its Post-Refusal Adjusted Balance, if any, 
will be deemed to have acknowledged its Post-Refusal Adjusted Balance 
and the Post-Refusal Adjusted Balance will then, in the ordinary course 
of settlement processing, be debited from or credited to its designated 
Fed Account through the NSS process.
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    \13\ DTC will provide reminders to Settling Banks when they have 
not affirmatively acknowledged their settlement balance. 
Notwithstanding delivery of reminders, once a Settling Bank is 
deemed to have acknowledged its balance, it may not notify DTC of a 
refusal to settle for a Participant for which it is the designated 
Settling Bank.
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    DTC will continue to maintain flexibility and allow for a Settling 
Bank to request extra time if the Settling Bank has a reason that it 
cannot affirmatively acknowledge or refuse its net-net settlement 
balance so long as the Settling Bank notifies DTC accordingly at or 
before the Acknowledgement Cutoff Time, or, in the case of a Post-
Refusal Adjusted Balance, it notifies DTC immediately where it is 
unable to affirmatively acknowledge its Post-Refusal Adjusted Balance. 
In this regard, the Guide will be updated to clarify that the Settling 
Bank is required to notify DTC of its request for extra time via a 
dedicated DTC Settlement phone ``hotline'' prior to the Acknowledgment 
Cutoff Time. In the event that DTC provides the Settling Bank with a 
Post-Refusal Adjusted Balance, the Settling Bank will be required to 
notify DTC of its request for extra time immediately via the hotline. 
Any Settling Bank that timely complies with this notification 
requirement will not be deemed to have acknowledged its net-net 
Settlement Balance or its Post-Refusal Adjusted Balance.\14\
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    \14\ If the problem is due to a connectivity issue with DTC, DTC 
may then direct the Settling Bank to submit its acknowledgement/
refusal instruction via email or as otherwise specified by DTC at 
that time.
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    If, after the initial release of final settlement figures, a 
Settling Bank's net-net settlement balance is adjusted for any reason, 
other than as a result of the Settling Bank's refusal to settle, then 
the Acknowledgment Cutoff Time for that Settling Bank will be extended 
to 30 minutes after DTC advises the Settling Bank of the adjusted net-
net settlement balance.
    DTC will attempt to contact the Settling Bank if DTC does not 
receive a response in the form of (i) an acknowledgment or refusal 
prior to the Acknowledgment Cutoff Time, (ii) an immediate 
acknowledgment of a Post-Refusal Adjusted Balance, or (iii) a 
notification from the Settling Bank that it cannot acknowledge or 
refuse, as described in the preceding paragraph.\15\ If DTC is able to 
contact the Settling Bank and the Settling Bank notifies DTC that it 
cannot, at that time, acknowledge or refuse its net-net settlement 
balance, or Post-Refusal Adjusted Balance, as applicable, then the 
Settling Bank will not be deemed to have acknowledged its net-net 
settlement balance. However, if the Settling Bank cannot be reached, 
the Settling Bank will be deemed to have acknowledged its net-net 
settlement balance or Post-Refusal Adjusted Balance, as applicable.
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    \15\ DTC uses the most recent contact information provided by 
the Settling Bank to its DTC Relationship Manager for this purpose.
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    DTC will update the Guide to clarify that each Settling Bank must 
ensure that it maintains accurate contact details with DTC so that DTC 
may contact the Settling Bank regarding settlement issues. Settling 
Banks must update any contact details by contacting their DTC 
Relationship Manager.
    The Fed's cutoff for NSS processing, unless extended, is 5:30 p.m. 
In order to facilitate timely processing of the NSS File, DTC will 
maintain discretion to exclude a Settling Bank's balance from the NSS 
File if the Settling Bank (i)(A) does not acknowledge its net-net 
settlement balance by the Acknowledgment Cutoff Time, or (B) does not 
immediately acknowledge its Post-Refusal Adjusted Balance; and (ii) is 
not deemed to have acknowledged its net-net settlement balance or Post-
Refusal Adjusted Balance because it has notified DTC that it is unable 
to affirmatively acknowledge its net-net settlement balance or to 
refuse to settle on behalf of a Participant. If DTC proceeds to process 
the NSS File excluding the Settling Bank's debit balance, then the 
Settling Bank must pay the debit balance via Fedwire. If DTC proceeds 
to process the NSS File excluding the Settling Bank's credit balance, 
then DTC will pay the credit balance via Fedwire after the Settling 
Bank acknowledges its settlement balance.
    The text of the Guide will also state that a Settling Bank which 
settles on behalf of others that timely notifies DTC that it cannot 
acknowledge or refuse its end-of-day net-net settlement balance will 
not be assessed a flat fee for failure to acknowledge or notify DTC of 
its refusal to settle. However, such a Settling Bank will be charged 
interest with respect to any borrowing DTC is required to make to 
complete settlement that day for any Participant that the Settling Bank 
settles on behalf of, if the Settling Bank has not timely refused to 
settle for that Participant.
    Additionally, DTC will revise the Guide to:
    (i) Clarify that it is DTC's Settlement Operations group that 
controls and coordinates the settling of Participant and Settling Bank 
accounts on DTC's systems;
    (ii) define the Federal Reserve Banks individually and collectively 
within the Guide's text as the ``Fed'' unless indicated otherwise;
    (iii) clarify text for descriptive purposes, and consistent with 
the Rules, that Participants make formal arrangements for a Settling 
Bank to be

[[Page 3220]]

designated as the Settling Bank to settle with DTC on the Participant's 
behalf;
    (iv) clarify that certain online reports DTC provides Participants 
and Settling Banks through the processing day reflect ``intraday'' 
gross debits and credits, and net debit and credit balances;
    (v) clarify that a Settling Bank's end-of-day net-net settlement 
balance includes the Settling Bank's own settlement obligations as a 
Participant if it settles for itself;
    (vi) add text for the purpose of context, consistent with the 
Rules, that each Participant is obligated to settle timely with DTC and 
if its Settling Bank refuses to settle for it then it must make 
alternative arrangements to make payment to DTC via Fedwire;
    (vii) add text for the purpose of context, consistent with the 
Rules, that a Participant that acts as its own Settling Bank may not 
refuse to settle for itself and that it will be in default if it does 
not fund its settlement obligation;
    (viii) for clarity, change the heading to an existing example of 
how a Settling Bank's settlement balance is calculated from 
``Settlement Example'' to ``Example of the Calculation of a DTC 
Settling Bank's Net-Net Settlement Balance'';
    (ix) remove the provision from the Guide indicating that that a 
Settling Bank that settles only for itself will need to affirmatively 
opt out in order to not be required to affirmatively acknowledge its 
settlement balance, and add text simply stating that a Settling Bank 
that settles only for itself will not be required to acknowledge its 
settlement balance;
    (x) clarify the interest charged to Participants for a failure to 
settle;
    (xi) delete references to a Settling Bank's failure to timely 
settle its settlement balance from being referred to as a ``failure to 
settle'' and remove references to related procedures as being 
``failure-to-settle'' procedures, as the terminology could be confused 
with an individual Participant's failure to meet its settlement 
obligation;
    (xii) rewrite text in the Guide in light of the proposed changes, 
as applicable, including Addendum A of the Guide, to incorporate 
proposed changes, consolidate text, clarify text for readability and 
eliminate duplication;
    (xiii) clarify certain Settling Bank and settlement processing 
timeframes;
    (xiv) apply initial capitalization as appropriate for the terms 
``Participant'' and ``Settling Bank'' where they are used as defined 
terms;
    (xv) remove references to Participant Terminal System (PTS) 
functions, which are no longer used for DTC settlement processing; and
    (xvi) insert the title of the Guide on the Guide's front page.
    Implementation. The effective date of the proposed rule change will 
be announced via a DTC Important Notice.

II. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \16\ 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. The Commission believes the proposal is 
consistent with Section 17A(b)(3)(F) of the Act \17\ and Rule 17Ad-
22(d)(5),\18\ as described in detail below.
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    \16\ 15 U.S.C. 78s(b)(2)(C).
    \17\ 15 U.S.C. 78q-1(b)(3)(F).
    \18\ 17 CFR 240.17Ad-22(d)(5).
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    Consistency with Section 17A(b)(3)(F) of the Act. 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.\19\ As described 
above, the change will reduce delays in the settlement process by 
allowing DTC to collect net debits and release net credits within 
scheduled timeframes despite the failure of a Settling Bank to 
affirmatively acknowledge its end-of-day net-net settlement balance or 
notify DTC of its refusal to settle for a Participant for which it is 
the designated Settling Bank on a timely basis. This requirement will 
reduce uncertainty and associated risks that may currently arise from 
Failure to Acknowledge, thus facilitating the prompt and accurate 
clearance and settlement of securities transactions.
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    \19\ 15 U.S.C. 78q-1(b)(3)(F).
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    Consistency with Rule 17Ad-22(d)(5). Rule 17Ad-22(d)(5) under the 
Act requires a clearing agency, such as DTC, to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to employ money settlement arrangements that eliminate or 
strictly limit the clearing agency's settlement bank risks and require 
funds transfers to the clearing agency to be final when effected.\20\ 
As described above, the change should reduce DTC's credit and liquidity 
risk by mitigating the risk that end-of-day net-net debit settlement 
balances would not be paid due to the failure of a Settling Bank to 
respond to DTC after posting of final settlement figures. The change 
also should create an arrangement that reduces delays in the settlement 
process by allowing DTC to collect net debits and release net credits 
within scheduled timeframes, which will limit the settlement risk to 
DTC. As such, the Commission believes that the proposal is consistent 
with Rule 17Ad-22(d)(5).\21\
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    \20\ 17 CFR 240.17Ad-22(d)(5).
    \21\ Id.
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III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and in 
particular with the requirements of Section 17A of the Act \22\ and the 
rules and regulations thereunder.
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    \22\ 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-2015-011 be, and hereby is, 
approved.\23\
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    \23\ 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.\24\
Robert W. Errett,
Deputy Secretary.
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    \24\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2016-00898 Filed 1-19-16; 8:45 am]
 BILLING CODE 8011-01-P