Document ID: SEC-2008-1576-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Depository Trust Co.
Posted Date: 2008-11-21T05:00Z

[Federal Register: November 21, 2008 (Volume 73, Number 226)]
[Notices]               
[Page 70686-70687]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr21no08-101]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58944; File No. SR-DTC-2008-09]

 
Self-Regulatory Organizations; The Depository Trust Company; 
Order Granting Approval of a Proposed Rule Change to Expand DTC's Debit 
Cap Look-Ahead Processing

November 13, 2008.

I. Introduction

    On September 12, 2008, The Depository Trust Company (``DTC'') filed 
with the Securities and Exchange Commission (``Commission'') proposed 
rule change SR-DTC-2008-09 pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'').\1\ Notice of the proposal 
was published in the Federal Register on March 7, 2008.\2\ No comment 
letters were received. 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\ Securities Exchange Act Release No. 58730 (October 3, 2008), 
73 FR 59694 (October 9, 2008).
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II. Description

    The proposed rule change amends the Look-Ahead Process in DTC's 
Settlement Services Guide to allow Money Market Issuance Deliveries 
pending for a Custodian's or Dealer's net debit cap to complete against 
Maturity Presentments pending for an Issuing/Paying Agent's net debit 
cap. DTC's processing system will calculate the net effect of the 
dollar amount of offsetting transactions in the accounts of the two 
Participants involved. If the net of the transactions result in 
positive risk management controls in those two accounts, the 
transactions will be completed.
    On June 10, 2003, the Commission approved a proposed rule change to 
establish a transaction Look-Ahead Process which became available for 
municipal and corporate bonds, including Money Market Instruments 
(``MMIs'').\3\ On August 11, 2004, the Commission approved another 
proposed rule change which expanded the application and extended the 
benefit of the Look-Ahead Process to all equity transactions.\4\ With 
this proposed rule change, DTC is proposing to expand the Look-Ahead 
Process to MMIs.
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    \3\Securities Exchange Act Release No. 48007 (June 10, 2003), 68 
FR 35744 (June 16, 2003) (File No. SR-DTC-2003-07).
    \4\Securities Exchange Act Release No. 50182 (August 11, 2004), 
69 FR 51341 (August 18, 2004) (File No. SR-DTC-2004-05).
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    The purpose of DTC's Look-Ahead Process is to reduce the number of 
recycling transactions in the system caused by the Net Debit Cap Risk 
Management Control.\5\ The existing Look-Ahead Process finds delivery 
transactions that are pending because the Receiving Participant has 
reached its net debit cap.\6\ It then looks to see whether the 
Receiving Participant has a pending delivery for the same security to 
another Participant.\7\ In such a situation, DTC's Account Transaction 
Processor (``ATP'')\8\ will calculate the net effect to the collateral 
\9\ and net debit cap controls for all three Participants involved. If 
the net effect will not result in a deficit in the collateral or net 
debit cap controls for any of the three Participants, ATP processes the 
transactions simultaneously. Without the Look-Ahead Process, the 
transaction would pend in DTC's system until another transaction 
created sufficient credit in the Receiving Participant's account. Most 
credits are generated when a Participant delivers securities versus 
payment, pledges securities for value, receives principal, dividend or 
other interest allocations, or wires funds (a Settlement Progress 
Payment (``SPP'')) to DTC's account at the Federal Reserve Bank of New 
York in order to reduce its DTC net debit.
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    \5\Net debit caps help ensure that DTC can complete settlement, 
even if a Participant fails to settle.
    \6\Before completing a transaction in which a Participant is the 
receiver, DTC calculates the resulting effect the transaction would 
have on the Participant's account and determines whether the 
resulting net balance would exceed the Participant's net debit cap. 
Any transaction that would cause the Participant's net settlement 
debit to exceed its net debit cap is placed in a pending (recycling) 
queue until another transaction creates credits in the Participant's 
account.
    \7\For example, Participant A is delivering shares to 
Participant B and Participant B has a delivery obligation of shares 
with the same CUSIP to Participant C.
    \8\ATP is the core processing system for all transaction 
activity affecting security positions held at DTC.
    \9\DTC tracks collateral in a Participant's account through its 
Collateral Monitor (``CM''). At all times, the CM reflects the 
amount by which the collateral in the account exceeds the net debit 
in the account. When processing a transaction, DTC verifies that the 
deliverer's and receiver's CMs will not become negative when the 
transaction completes. If the transaction would cause either party 
to have a negative CM, the transaction will recycle until the 
deficient account has sufficient collateral for the transaction to 
complete.
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    In order to further reduce the number of recycling transactions in 
the system and to further improve the timeliness and certainty of 
transactions completing, DTC is expanding the Look-Ahead Process beyond 
same securities for MMIs to allow pairs of money market instrument 
transactions between two Participants (i.e., an Issuing Paying Agent 
[``IPA''] and a custodian or dealer) that are pending for both parties' 
net debit caps to complete. This situation occurs when an IPA has a 
delivery of a new money market instrument to a custodian or a dealer 
for X dollars and that same custodian or dealer has a maturity of a 
money market instrument of equal or greater value awaiting acceptance 
by the same IPA. The proposed rule change will allow ATP to process 
those transactions simultaneously, as long as neither Participant's 
risk management controls were overridden.
    This enhancement to the Look-Ahead Process will reduce the number 
of MMI recycling transactions. The Look-Ahead enhancement to DTC's 
processing system will not result in any systematic changes for 
Participants.

III. Discussion

    Section 17A(b)(3)(F) of the Act requires that the rules of a 
clearing agency be designed to assure the

[[Page 70687]]

safeguarding of securities and funds which are in the custody or 
control of the clearing agency or for which it is responsible.\10\ When 
the Commission approved DTC's Debit Cap Look-Ahead Process in 2003 for 
municipal and corporate debt transactions and the expansion of the 
process to include all equity transactions, all valued pledge 
transactions, and all valued release transactions in 2004, the 
Commission found that the Look-Ahead Process was consistent with DTC's 
obligations under Section 17A(b)(3)(F) to promote the prompt and 
accurate clearance and settlement of securities transactions.\11\ 
Similarly, the expansion of the Look-Ahead Process beyond same 
securities for MMIs is designed to reduce the number of pending MMI 
transactions at DTC without compromising DTC's risk management 
controls. Accordingly, based on this and the earlier findings, we find 
that the expansion of the Debit Cap Look-Ahead Process for MMIs should 
promote the prompt and accurate clearance and settlement of securities 
transactions.
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    \10\ 15 U.S.C. 78q-1(b)(3)(F).
    \11\ Securities Exchange Act Release Nos. 48007 and 50182.
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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 Section 17A of the Act and the rules and regulations 
thereunder.\12\
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    \12\ 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).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-DTC-2008-09) be and hereby 
is approved.
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    \13\ 17 CFR 200.30-3(a)(12).

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
Florence E. Harmon,
Acting Secretary.
 [FR Doc. E8-27674 Filed 11-20-08; 8:45 am]

BILLING CODE 8011-01-P