Document ID: SEC-2016-0793-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Depository Trust Co.
Posted Date: 2016-05-05T04:00Z

[Federal Register Volume 81, Number 87 (Thursday, May 5, 2016)]
[Notices]
[Pages 27181-27183]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-10473]

[[Page 27181]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77750; File Nos. SR-DTC-2016-801; SR-NSCC-2016-801]

Self-Regulatory Organizations; The Depository Trust Company; 
National Securities Clearing Corporation; Notice of Filing of and No 
Objection to Advance Notices To Renew the Credit Facility

April 29, 2016.
    Pursuant to section 806(e)(1) of title VIII of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act entitled the Payment, 
Clearing, and Settlement Supervision Act of 2010 (``Clearing 
Supervision Act'') \1\ and Rule 19b-4(n)(1)(i) under the Securities 
Exchange Act of 1934 (``Act''),\2\ notice is hereby given that on April 
15, 2016, The Depository Trust Company (``DTC'') and National 
Securities Clearing Corporation (``NSCC,'' together with DTC, 
``Clearing Agencies'') filed with the Securities and Exchange 
Commission (``Commission'') the advance notices SR-DTC-2016-801 and SR-
NSCC-2016-801 (``Advance Notices'') as described in Items I, II and III 
below, which Items have been prepared primarily by the Clearing 
Agencies. The Commission is publishing this notice to solicit comments 
on the Advance Notices from interested persons and providing notice 
that the Commission does not object to the Advance Notices.
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    \1\ 12 U.S.C. 5465(e)(1).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
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I. Clearing Agencies' Statement of the Terms of Substance of the 
Advance Notices

    The Advance Notices are filed by the Clearing Agencies in 
connection with the proposed renewal (the ``Renewal'') of the Clearing 
Agencies' 364-day committed revolving credit facility (the ``Credit 
Facility''). The Renewal is described in greater detail below.\3\
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    \3\ Terms not defined herein are defined in NSCC's Rules and 
Procedures (``NSCC Rules''), available at www.dtcc.com/~/media/
Files/Downloads/legal/rules/nscc_rules.pdf or DTC's Rules, available 
at www.dtcc.com/~/media/Files/Downloads/legal/rules/dtc_rules.pdf.
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II. Clearing Agencies' Statement of the Purpose of, and Statutory Basis 
for, the Advance Notices

    In their filings with the Commission, the Clearing Agencies 
included statements concerning the purpose of and basis for the Advance 
Notices and discussed any comments they received on the Advance 
Notices. The text of these statements may be examined at the places 
specified in Item IV below. The Clearing Agencies have prepared 
summaries, set forth in sections A and B below, of the most significant 
aspects of such statements.

(A) Clearing Agencies' Statement on Comments on the Advance Notices 
Received From Members, Participants, or Others

    The Clearing Agencies have not solicited or received any written 
comments relating to these proposals. The Clearing Agencies will notify 
the Commission of any written comments received by the Clearing 
Agencies.

(B) Advance Notices Filed Pursuant to Section 806(e) of the Payment, 
Clearing and Settlement Supervision Act

Description of the Proposed Change
    As part of their liquidity risk management regime, the Clearing 
Agencies maintain a 364-day committed revolving line of credit with a 
syndicate of commercial lenders, which is renewed every year. The terms 
and conditions of the current Renewal would be specified in the 
Fifteenth Amended and Restated Revolving Credit Agreement, to be dated 
as of May 10, 2016 (``Renewal Agreement''), among the Clearing 
Agencies,\4\ the lenders party thereto, the administrative agent and 
the collateral agent, and are substantially the same as the terms and 
conditions of the existing credit agreement, dated as of May 12, 2015, 
as heretofore amended (``Existing Agreement''),\5\ except that pricing 
and the amount of the aggregate commitment for NSCC may change. The 
substantive terms of the Renewal Agreement are set forth in the Summary 
of Indicative Principal Terms and Conditions, dated March 24, 2016, 
which is not a public document. The aggregate commitments being sought 
under the Renewal would be for an amount up to $14 billion for NSCC and 
DTC together, of which all but a $1.9 billion commitment would be the 
aggregate commitment to NSCC as borrower as is provided in the Existing 
Agreement.
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    \4\ The Renewal Agreement would provide for both DTC and NSCC as 
borrowers, with an aggregate commitment of $1.9 billion for DTC and 
the amount of any excess aggregate commitment for NSCC. The 
borrowers are not jointly and severally liable and each lender has a 
ratable commitment to each borrower. DTC and NSCC provide separate 
collateral to secure their respective borrowings.
    \5\ See Securities Exchange Act Release No. 74906 (May 7, 2015), 
80 FR 27714 (May 14, 2015) (SR-DTC-2015-801; SR-NSCC-2015-801).
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Expected Effect on Risks to the Clearing Agencies, Their Participants, 
and the Market
    The Renewal would continue to promote the reduction of risks to the 
Clearing Agencies, their members, and the securities market in general 
because it would (1) help DTC maintain sufficient liquidity resources 
to complete system-wide settlement on each business day, with a high 
degree of confidence and notwithstanding the failure-to-settle of the 
Participant, or affiliated family of Participants, with the largest net 
settlement obligation; and (2) help NSCC maintain sufficient liquidity 
resources to timely meet its settlement obligations with a high degree 
of confidence. The Renewal Agreement and its substantially similar 
predecessor agreements have been in place since the introduction of 
same day funds settlement at the Clearing Agencies.
Management of Identified Risks
    The Clearing Agencies require same day liquidity resources to cover 
the failure-to-settle of NSCC's Member, or affiliated family of 
Members, with the largest aggregate liquidity exposure, or of DTC's 
Participant, or affiliated family of Participants, with the largest net 
settlement obligation. If an NSCC Member defaults or a DTC Participant 
fails to satisfy its end-of-day net settlement obligation, each 
Clearing Agency may borrow under its line of credit to enable it, if 
necessary, to fund settlement among non-defaulting Members or DTC 
Participants.
    Any NSCC borrowing would be secured principally by (i) securities 
deposited by Members in NSCC's Clearing Fund \6\ (i.e., the Eligible 
Clearing Fund Securities, as defined in NSCC's Rules, pledged by 
Members to NSCC in lieu of cash Clearing Fund deposits) and (ii) 
securities cleared through NSCC's Continuous Net Settlement System that 
were intended for delivery to the defaulting Member upon payment of its 
net settlement obligation. In addition to the Credit Facility and the 
Clearing Fund, NSCC has diversified its liquidity resources by 
implementing a commercial paper and extendible-term note facility.\7\ 
As integral parts of NSCC's risk management structure, the Credit

[[Page 27182]]

Facility, the commercial paper and extendible-term note facility and 
the Clearing Fund, together, provide NSCC liquidity to complete end-of-
day net funds settlement.
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    \6\ NSCC's Clearing Fund (which operates as its default fund) 
addresses potential exposure through a number of risk-based 
component charges calculated and assessed daily and includes 
additional liquidity deposits by certain Members pursuant to NSCC's 
Supplemental Liquidity Deposits rule (NSCC's Rule 4(A), supra note 
3).
    \7\ See Securities Exchange Act Release No. 75730 (August 19, 
2015), 80 FR 51638 (August 25, 2015) (SR-NSCC-2015-802).
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    Any DTC borrowing would be secured principally by securities that 
were intended to be delivered to the defaulting Participant upon 
payment of its net settlement obligation and securities previously 
designated by the defaulting Participant as collateral. The Credit 
Facility is built into DTC's primary risk management controls, the Net 
Debit Cap \8\ and Collateral Monitor,\9\ which together require that 
the end-of-day net funds settlement obligation of a Participant cannot 
exceed DTC's liquidity resources and is fully collateralized.
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    \8\ The Net Debit Cap risk control is designed so that DTC may 
complete settlement among non-defaulting Participants, even if the 
Participant or affiliated family of Participants with the largest 
settlement obligation that day fails to settle. Before completing a 
transaction in which a Participant is the receiver, DTC calculates 
the effect the transaction would have on such Participant's 
Settlement Account, and determines whether any resulting Net Debit 
Balance would exceed the Participant's Net Debit Cap. Any 
transaction that would cause the Net Debit Balance to exceed the Net 
Debit Cap is placed on a pending (recycling) queue until the Net 
Debit Cap will not be exceeded by processing the transaction.
    \9\ DTC tracks Collateral in a Participant's account through the 
Collateral Monitor. At all times, the Collateral Monitor reflects 
the amount by which the Collateral Value in the account exceeds the 
Net Debit Balance in the account. When processing a transaction, DTC 
verifies that the Collateral Monitor of each of the deliverer and 
receiver will not become negative when the transaction is processed. 
If the transaction would cause either party's Settlement Account to 
have insufficient collateral to support its net settlement 
obligation, the transaction will recycle until the deficient account 
has sufficient Collateral to proceed or until the applicable cutoff 
time occurs.
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    The Credit Facility is a cornerstone of each of the Clearing 
Agencies' risk management, and this Renewal is critical to each of the 
Clearing Agencies' risk management infrastructure. Because the Renewal 
Agreement would preserve substantially similar terms and conditions to 
the Existing Agreement, the Clearing Agencies believe that the Renewal 
would not otherwise affect or alter the management of risk at the 
Clearing Agencies.
Consistency With the Clearing Supervision Act
    The Clearing Agencies believe the Renewal is consistent with 
section 805(b) of the Clearing Supervision Act.\10\ The objectives and 
principles of section 805(b) of the Clearing Supervision Act are the 
promotion of robust risk management, promotion of safety and soundness, 
reduction of systemic risks, and support of the stability of the 
broader financial system.\11\ The Clearing Agencies believe that the 
Renewal would promote these objectives and principles because it would 
provide a continuing source of committed liquidity for NSCC to meet its 
settlement obligations and for DTC to complete net funds settlement 
among non-defaulting Participants, thus mitigating liquidity risk.
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    \10\ 12 U.S.C. 5464(b).
    \11\ Id.
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    The Clearing Agencies believe the Renewal also is consistent with 
Clearing Agency Standards, in particular, Commission Rule 17Ad-22(b)(3) 
\12\ and Rule 17Ad-22(d)(11).\13\ Commission Rule 17Ad-22(b)(3) \14\ 
requires a central counterparty, like NSCC, to ``establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to . . . [m]aintain sufficient financial resources to 
withstand, at a minimum, a default by the participant family to which 
it has the largest exposure in extreme but plausible market conditions 
. . . .'' The Clearing Agencies believe the Renewal is consistent with 
Rule 17Ad-22(b)(3) \15\ because it would help NSCC maintain sufficient 
financial resources to withstand, at a minimum, a default by a Member 
to which NSCC has the largest exposure.
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    \12\ 17 CFR 240.17Ad-22(b)(3).
    \13\ 17 CFR 240.17Ad-22(d)(11).
    \14\ 17 CFR 240.17Ad-22(b)(3).
    \15\ Id.
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    Commission Rule 17Ad-22(d)(11) \16\ requires that registered 
clearing agencies, like NSCC and DTC, ``establish, implement, maintain 
and enforce written policies and procedures reasonably designed to, as 
applicable . . . establish default procedures that ensure that the 
clearing agency can take timely action to contain losses and liquidity 
pressures and to continue meeting its obligations in the event of a 
participant default.'' The Clearing Agencies believe that the Renewal 
is consistent with Rule 17Ad-22(d)(11) \17\ because it would provide 
the Clearing Agencies with a readily available liquidity resource that 
would enable the Clearing Agencies to continue to meet their 
obligations in a timely fashion, in the event of a Member default at 
NSCC or Participant default at DTC, thereby helping to contain losses 
and liquidity pressures from that default.
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    \16\ 17 CFR 240.17Ad-22(d)(11).
    \17\ Id.
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III. Date of Effectiveness of the Advance Notices and Timing for 
Commission Action

    The proposed change may be implemented if the Commission does not 
object to the proposed change within 60 days of the later of (i) the 
date that the proposed change was filed with the Commission or (ii) the 
date that any additional information requested by the Commission is 
received. The Clearing Agencies shall not implement the proposed change 
if the Commission has any objection to the proposed change.
    The Commission may extend the period for review by an additional 60 
days if the proposed change raises novel or complex issues, subject to 
the Commission providing the Clearing Agencies with prompt written 
notice of the extension. A proposed change may be implemented in less 
than 60 days from the date the Advance Notices are filed, or the date 
further information requested by the Commission is received, if the 
Commission notifies the Clearing Agencies in writing that it does not 
object to the proposed change and authorizes the Clearing Agencies to 
implement the proposed change on an earlier date, subject to any 
conditions imposed by the Commission.
    The Clearing Agencies shall post notice on their Web site of 
proposed changes that are implemented.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the Advance 
Notices are consistent with the Clearing Supervision Act. Comments may 
be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-DTC-2016-801 or SR-NSCC-2016-801 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-DTC-2016-801 or SR-NSCC-
2016-801. One of these file numbers 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

[[Page 27183]]

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 Advance Notices 
that are filed with the Commission, and all written communications 
relating to the Advance Notices 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 Room, 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 the filings also will be 
available for inspection and copying at the principal office of the 
Clearing Agencies and on DTCC's Web site (http://dtcc.com/legal/sec-rule-filings.aspx). 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-2016-801 or SR-NSCC-2016-801 and should be submitted on or 
before May 26, 2016.

V. Commission Findings and Notice of No Objection

    Although the Clearing Supervision Act does not specify a standard 
of review for an advance notice, its stated purpose is instructive.\18\ 
The stated purpose is to mitigate systemic risk in the financial system 
and promote financial stability by, among other things, promoting 
uniform risk management standards for systemically important financial 
market utilities (``FMUs'') and strengthening the liquidity of 
systemically important FMUs.\19\ Section 805(a)(2) of the Clearing 
Supervision Act authorizes the Commission to prescribe risk management 
standards for the payment, clearing, and settlement activities of 
designated clearing entities and financial institutions engaged in 
designated activities for which it is the Supervisory Agency or the 
appropriate financial regulator.\20\ Section 805(b) of the Clearing 
Supervision Act states that the objectives and principles for the risk 
management standards prescribed under section 805(a) shall be to:
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    \18\ See 12 U.S.C. 5461(b).
    \19\ Id.
    \20\ 12 U.S.C. 5464(a)(2).
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     Promote robust risk management;
     promote safety and soundness;
     reduce systemic risks; and
     support the stability of the broader financial system.\21\
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    \21\ 12 U.S.C. 5464(b).
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    The Commission has adopted risk management standards under section 
805(a)(2) of the Clearing Supervision Act and the Act (``Clearing 
Agency Standards'').\22\ The Clearing Agency Standards require 
registered clearing agencies to establish, implement, maintain, and 
enforce written policies and procedures that are reasonably designed to 
meet certain minimum requirements for their operations and risk 
management practices on an ongoing basis.\23\ Therefore, it is 
appropriate for the Commission to review advance notices against these 
Clearing Agency Standards and the objectives and principles of these 
risk management standards as described in section 805(b) of the 
Clearing Supervision Act.\24\
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    \22\ See 17 CFR 240.17Ad-22; Securities Exchange Act Release No. 
68080 (October 22, 2012), 77 FR 66220 (November 2, 2012) (S7-08-11).
    \23\ Id.
    \24\ 12 U.S.C. 5464(b).
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    The Commission believes that the proposal in the Advance Notices is 
consistent with Clearing Agency Standards, in particular, Rule 17Ad-
22(d)(11) of the Act \25\ for NSCC and DTC, and Rule 17Ad-22(b)(3) of 
the Act \26\ for NSCC. Rule 17Ad-22(d)(11) requires that registered 
clearing agencies ``establish, implement, maintain and enforce written 
policies and procedures reasonably designed to, as applicable . . . 
establish default procedures that ensure that the clearing agency can 
take timely action to contain losses and liquidity pressures and to 
continue meeting its obligations in the event of a participant 
default.'' \27\ The Commission believes that the proposal is consistent 
with Rule 17Ad-22(d)(11) because the renewed Credit Facility will 
provide the Clearing Agencies with a readily available liquidity 
resource that will enable them to continue to meet their respective 
obligations in a timely fashion, in the event of a member default, 
thereby helping to contain losses and liquidity pressures from that 
default.
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    \25\ 17 CFR 240.17Ad-22(d)(11).
    \26\ 17 CFR 240.17Ad-22(b)(3).
    \27\ 17 CFR 240.17Ad-22(d)(11).
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    Rule 17Ad-22(b)(3) of the Act requires a central counterparty, like 
NSCC, to ``establish, implement, maintain and enforce written policies 
and procedures reasonably designed to . . . [m]aintain sufficient 
financial resources to withstand, at a minimum, a default by the 
participant family to which it has the largest exposure in extreme but 
plausible market conditions . . . .'' \28\ The Commission believes that 
the proposal is consistent with Rule 17Ad-22(b)(3) because the renewed 
credit facility will continue to provide NSCC with a readily available 
liquidity resource that helps NSCC maintain sufficient financial 
resources to withstand, at a minimum, a default by an NSCC member to 
which NSCC has the largest exposure.
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    \28\ 17 CFR 240.17Ad-22(b)(3).
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    For these reasons, the Commission believes the Advance Notices are 
consistent with the objectives and principles described in section 
805(b) of the Clearing Supervision Act,\29\ including that they reduce 
systemic risks and support the stability of the broader financial 
system. As discussed above, the renewal of the Credit Facility will 
provide the Clearing Agencies needed liquidity if they experience 
severe liquidity pressure from a member default. Given that the 
Clearing Agencies have been designated as systemically important FMUs, 
the Clearing Agencies' ability to provide their clearing services 
during such an event contributes to reducing systemic risks and 
supporting the stability of the broader financial system.
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    \29\ 12 U.S.C. 5464(b).
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    For the reasons stated above, the Commission does not object to the 
Advance Notices.

VI. Conclusion

    It is therefore noticed, pursuant to section 806(e)(1)(I) of the 
Clearing Supervision Act,\30\ that the Commission does not object to 
the Advance Notices SR-DTC-2016-801 and SR-NSCC-2016-801 and that DTC 
and NSCC be and hereby are authorized to implement the change as of the 
date of this notice.
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    \30\ 12 U.S.C. 5465(e)(1)(I).

    By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2016-10473 Filed 5-4-16; 8:45 am]
 BILLING CODE 8011-01-P