Document ID: SEC-2017-0744-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Depository Trust Co.
Posted Date: 2017-05-10T04:00Z

[Federal Register Volume 82, Number 89 (Wednesday, May 10, 2017)]
[Notices]
[Pages 21837-21839]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-09426]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80598; File No. SR-DTC-2017-001]

Self-Regulatory Organizations; The Depository Trust Company; 
Order Granting Approval of Proposed Rule Change To Establish a Sub-
Account for Use With the DTCC Euroclear Global Collateral Ltd 
Collateral Management Service and Provide for the Authorization of a 
Representative To Receive Information About the Sub-Account

May 4, 2017.
    On March 9, 2017, The Depository Trust Company (``DTC'') filed with 
the Securities and Exchange Commission (``Commission'') proposed rule 
change SR-DTC-2017-001 pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder.\2\ The 
proposed rule change was published for comment in the Federal Register 
on March 24, 2017.\3\ 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\ See Securities Exchange Act Release No. 80280 (March 20, 
2017), 82 FR 15081 (March 24, 2017) (SR-DTC-2017-001) (``Notice'').
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I. Description of the Proposed Rule Change

    The proposed rule change consists of amendments to the Rules, By-
Laws and Organization Certificate of The Depository Trust Company 
(``DTC Rules'') \4\ in order to add new Rule 35 (CMS Reporting). The 
proposed rule would provide that any DTC participant that is, or is 
acting on behalf of, a user of certain collateral management services 
(``CMS'') \5\ of DTCC Euroclear Global Collateral Ltd. (``DEGCL'') \6\ 
may establish one or more sub-Accounts at DTC in connection with CMS 
(each, a ``CMS Sub-Account''). A DTC participant that establishes a CMS 
Sub-Account pursuant to the proposed rule (``CMS Participant'') would 
thereby: (i) Authorize DEGCL to receive account and transactional 
information and reports with respect to the CMS Sub-Account, and (ii) 
direct DTC to provide such information and reports to DEGCL, as 
described below.
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    \4\ Available at http://www.dtcc.com/legal/rules-and-procedures.aspx.
    \5\ In particular, there would be a CMS option authorizing 
DEGCL, on behalf of the CMS User, to propose collateral allocations 
to satisfy counterparty obligations of the CMS User, referred to by 
DEGCL as the ``Allocation Option'' and further explained below.
    \6\ DEGCL is a joint venture of The Depository Trust & Clearing 
Corporation (``DTCC''), the corporate parent of DTC, and Euroclear 
S.A./N.V. (``Euroclear''), the corporate parent of Euroclear Bank, 
described further below. DTC understands that CMS will be operated 
by Euroclear Bank and other entities in the Euroclear group, as 
service providers to DEGCL, in accordance with appropriate 
agreements between them.
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A. DEGCL Background

    DTC states that DEGCL performs information and record-keeping 
services for CMS users that have entered into user agreements with 
DEGCL for this purpose (``CMS Users'').\7\ CMS Users are financial 
institutions that are counterparties to agreements establishing 
obligations between them to provide securities collateral with respect 
to swaps or other types of financing transactions.\8\ These bilateral 
swap or other financing agreements are entered into by such 
counterparties outside and independent of DEGCL or DTC.\9\
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    \7\ Notice, 82 FR at 15082.
    \8\ Id.
    \9\ DTC states that a CMS User will typically be a major 
financial institution or buy-side investor that is a bank, broker 
dealer, or investment company. CMS Users will enter into a 
Collateral Management Service Agreement with DEGCL, which includes 
general terms of conditions and operating procedures (``CMS 
Agreement''). Id.
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    This proposed rule change relates to one of the services that DEGCL 
proposes to offer, the DEGCL ``Allocation Option'' (also referred to as 
``auto-select''). DTC states that the Allocation Option would only be 
used with DTC eligible securities held in a CMS Sub-Account by a CMS 
Participant (``CMS

[[Page 21838]]

Securities'').\10\ The Allocation Option is dependent on DEGCL 
receiving certain information from DTC for the applicable CMS Sub-
Account of the applicable CMS Participant.\11\ The proposed rule change 
would provide a mechanism for a CMS Participant to authorize DEGCL as 
the CMS Participant's ``CMS Representative'' to receive the necessary 
information from DTC, and to direct DTC to provide DEGCL with that 
information, as described below.
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    \10\ Id.
    \11\ The CMS Participant may be a CMS User acting for itself or 
a DTC participant acting on behalf of a CMS User as the CMS 
Participant. Id.
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B. The Proposed Rule Change

    The proposed rule change would allow a CMS Participant to establish 
one or more CMS Sub-Accounts. Upon doing so, a CMS Participant would be 
able to instruct DTC to transfer securities to the CMS Participant's 
CMS Sub-Account. Such securities (i.e., CMS Securities) would then be 
available for allocation by DEGCL for delivery or pledge by book-entry 
at DTC in accordance with DTC Rules and Procedures (including risk 
management controls),\12\ in satisfaction of the various collateral 
obligations of the CMS Participant or the CMS User on behalf of which 
the CMS Participant is acting.\13\
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    \12\ DTC states that its risk management controls, including 
Collateral Monitor and Net Debit Cap (as defined in Rule 1, Section 
1 of the DTC Rules, supra note 4), are designed so that DTC may 
complete system-wide settlement notwithstanding the failure to 
settle of its largest participant or affiliated family of 
participants. The Collateral Monitor tests whether a DTC participant 
has sufficient collateral for DTC to pledge or liquidate if that 
participant were to fail to meet its settlement obligation. Id. 
Pursuant to these controls under applicable DTC Rules and 
Procedures, any delivery instruction order to a CMS Sub-Account that 
would cause the CMS Participant to exceed its Net Debit Cap or to 
have insufficient DTC Collateral to secure its obligations to DTC, 
would not be processed by DTC. Id. Deliveries would be processed in 
the same order and with the same priority as otherwise provided in 
the DTC Rules and Procedures, i.e., such deliveries would not take 
precedence over any other type of delivery in the DTC system. Id.
    \13\ Id. at 15082-83.
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    By establishing a CMS Sub-Account, a CMS Participant would be (i) 
authorizing DEGCL, as its CMS Representative, to receive in report 
form, the information defined below regarding CMS Securities credited 
to the CMS Sub-Account at the time of the report (``CMS Report''), and 
regarding any delivery or pledge from, or delivery or release to, the 
CMS Sub-Account (``CMS Delivery Information''); \14\ (ii) representing 
and warranting that it is duly authorized to instruct DTC to provide 
the CMS Reports and CMS Delivery Information about such CMS Sub-Account 
to DEGCL; (iii) directing DTC to provide the CMS Reports and CMS 
Delivery Information to DEGCL; \15\ and (iv) representing and 
warranting that it would conduct business in such CMS Sub-Account as 
provided in proposed Rule 35, and otherwise pursuant to the DTC Rules 
and Procedures, and in compliance with applicable law.
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    \14\ Each CMS Participant would continue to be liable as 
principal for the actions of its CMS Representative and would 
indemnify DTC against any claim or loss arising from any act or 
omission of its CMS Representative, or arising from DTC's provision 
of the CMS Report and CMS Delivery Information to DEGCL or the 
receipt and use thereof by DEGCL, except to the extent caused 
directly by DTC's gross negligence or willful misconduct. Id. at 
15083.
    \15\ The CMS Report and CMS Delivery Information would be 
transmitted to DEGCL using DTCC's existing Common Data Transfer 
Service (``CDTS'') over a dedicated BT Radianz link. See CDTS User 
Guide and Schemas, available at http://www.dtcc.com/~/media/Files/
Downloads/Settlement-Asset-Services/Underwriting/CDTS.zip. BT 
Radianz is an existing DTCC network service provider. CDTS is DTCC's 
proprietary file input and output management system. Id. It enables 
DTCC to securely and reliably automate the exchange of files over a 
network link with its Participants, Members, and third-parties. Id.
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    The CMS Report would include, with respect to the CMS Securities 
credited to a CMS Sub-Account of such CMS Participant at the time of 
such report, (i) the Committee on Uniform Securities Identification 
Procedures (``CUSIP'') number, International Securities Identification 
Number (``ISIN''), or other identification number of the CMS 
Securities; and (ii) the number of shares or other units or principal 
amount of the CMS Securities. CMS Delivery Information would be 
provided in real time, and would include, with respect to each delivery 
or pledge of CMS Securities from, or delivery or release of CMS 
Securities to a CMS Sub-Account, a copy of any delivery, pledge, or 
release message with respect to the CMS Sub-Account, including (i) the 
CUSIP, ISIN, or other identification number of such CMS Securities, and 
(ii) the number of shares or other units or principal amount of such 
CMS Securities.

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 the Act, specifically Section 17A(b)(3)(F) of the Act 
and Rule 17Ad-22(e)(20) under the Act, as discussed below.\17\
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    \16\ 15 U.S.C. 78s(b)(2)(C).
    \17\ 15 U.S.C. 78q-1(b)(3)(F); 17 CFR 240.17Ad-22(20).
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A. Consistency With Section 17A

    Section 17A(b)(3)(F) of the Act requires, among other things, that 
the rules of the clearing agency be designed to promote the prompt and 
accurate clearance and settlement of securities transactions.\18\ As 
described above, the proposed rule change would permit a CMS 
Participant (i.e., a DTC participant acting for itself or on behalf of 
a CMS User) to establish a CMS Sub-Account at DTC. Securities 
transferred to the CMS Sub-Account would then be available for 
allocation by DEGCL, via DTC, to satisfy various collateral obligations 
through the DEGCL Allocation Option. By monitoring transactions of a 
CMS User with multiple counterparties, the Allocation Option could 
offer efficiency by automating the selection of appropriate securities 
collateral to satisfy applicable collateral obligations. The proposed 
rule change could allow CMS Participants to avail themselves of the 
efficiency of the Allocation Option, such as not needing to transmit 
delivery and position information to DEGCL, by providing a mechanism 
for DTC to provide information on behalf of CMS Participants to DEGCL. 
Therefore, the Commission believes that the proposed rule change could 
help streamline the settlement of collateral transactions, thereby 
promoting the prompt and accurate clearance and settlement, consistent 
Section 17A(b)(3)(F), cited above.
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    \18\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(20)

    Rule 17Ad-22(e)(20) under the Act requires a clearing agency, such 
as DTC, to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to identify, monitor, and manage 
risks related to any link DTC establishes with one or more other 
clearing agencies, financial market utilities, or trading markets.\19\ 
In developing the proposed rule change, DTC states that it evaluated 
the risks that could arise by establishing a link with DEGCL.\20\ In 
particular, DTC identified the risk of data error from the 
communication link or the external communication of a CMS Participant's 
proprietary information.\21\ DTC determined that the identified risks 
could be mitigated because (i) the

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Allocation Option would not require any material change to DTC's 
settlement framework, technology, or operating procedures including 
existing settlement cycles and risk management controls; (ii) DTCC's 
Technology Risk Management existing control procedures could manage 
data integrity and authorization provisioning to mitigate information 
and technology risk; and (iii) DEGCL is only receiving CMS Reports and 
CMS Delivery Information from a CMS Sub-Account specifically designated 
for this purpose by a CMS Participant.\22\ Therefore, the Commission 
believes that DTC has sought to identify, monitor, and manage the 
relevant risks associated with the proposed rule change, consistent 
with Rule 17Ad-22(e)(20), cited above.
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    \19\ 17 CFR 240.17Ad-22(e)(20).
    \20\ Notice, 82 FR at 15084.
    \21\ Id.
    \22\ 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, in particular 
the requirements of Section 17A of the Act \23\ and the rules and 
regulations thereunder.
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    \23\ 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-2017-001 be, and hereby is, 
approved.\24\
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    \24\ 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).
    \25\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-09426 Filed 5-9-17; 8:45 am]
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