Document ID: SEC-2016-2022-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Depository Trust Co.
Posted Date: 2016-11-18T05:00Z

[Federal Register Volume 81, Number 223 (Friday, November 18, 2016)]
[Notices]
[Pages 81825-81828]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-27742]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79304; File No. SR-DTC-2016-013]

Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
To Modify the DTC Settlement Service Guide and Distributions Guide 
Relating to the Anticipated U.S. Market Transition to a Shortened 
Settlement Cycle

November 14, 2016.
    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 November 7, 2016, The Depository Trust Company (``DTC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II and III below, which 
Items have been prepared by the clearing agency. DTC filed the proposed 
rule change pursuant to Section 19(b)(3)(A) \3\ of the Act and Rule 
19b-4(f)(4) \4\ thereunder. The proposed rule change was effective upon 
filing with the Commission. The Commission is

[[Page 81826]]

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.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(4).
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change would amend the Settlement Service Guide 
(``Settlement Guide'') \5\ and the Distributions Guide (``Distributions 
Guide'') \6\ (collectively, ``Guides'') of The Depository Trust Company 
(``DTC'') to make technical revisions to the Guides in anticipation of 
the U.S. market transition to ``T+2'' settlement and other revisions, 
as described below.\7\ The proposed rule changes to the Guides would 
not become effective until DTC has submitted a subsequent proposed rule 
change under Rule 19b-4.\8\ Therefore, DTC would not implement versions 
of the Guides reflecting the proposed rule change until an effective 
date is established by the subsequent proposed rule change.\9\
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    \5\ Available at http://www.dtcc.com/~/media/Files/Downloads/
legal/service-guides/Settlement.pdf.
    \6\ Available at http://www.dtcc.com/~/media/Files/Downloads/
legal/service-guides/
Distributions%20Service%20Guide%20FINAL%20November%202014.pdf.
    \7\ Capitalized terms not otherwise defined herein have the 
respective meanings set forth in the DTC Rules, By-laws and 
Organization Certificate (``Rules''), available at http://www.dtcc.com/legal/rules-and-procedures.aspx, the Settlement Guide 
and the Distributions Guide.
    \8\ 17 CFR 240.19b-4.
    \9\ DTC will post versions of the relevant sections of the 
respective Guides reflecting the changes as they would appear upon 
the effectiveness of the subsequent proposed rule change mentioned 
above and will include a note on the cover page of the Guides to 
advise Participants of these changes.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, the clearing agency 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. The clearing agency has prepared summaries, 
set forth in sections A, B, and C below, of the most significant 
aspects of such statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

1. Purpose
    The standard settlement cycle for certain securities has not 
changed since 1993, when the Commission adopted the current version of 
Rule 15c6-1(a) under the Act,\10\ which (subject to certain exceptions) 
prohibits any broker-dealer from entering into a contract for the 
purchase or sale of a security that provides for payment and delivery 
later than three business days after the trade date, unless otherwise 
expressly agreed to by the parties at the time of the transaction.
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    \10\ 17 CFR 240.15c6-1.
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    In an effort to reduce counterparty risk, decrease clearing capital 
requirements, reduce liquidity demands and harmonize the settlement 
cycle globally, the financial services industry, in coordination with 
its regulators, has been working on shortening the standard settlement 
cycle from T+3 to T+2. In connection therewith, the Commission has 
proposed a rule change to shorten the standard settlement cycle from 
T+3 to T+2.\11\
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    \11\ Amendment to Securities Transaction Settlement Cycle. See 
Securities Exchange Act Release No. 78962 (September 28, 2016), 81 
FR 69240 (October 5, 2016) (S7-22-16).
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Effect on DTC
    DTC provides depository and book-entry services pursuant to its 
Rules and Procedures, including its service guides and operational 
arrangements.\12\ DTC services include custody of securities 
certificates and other instruments, and settlement and asset services 
for types of eligible securities including, among others, equities, 
warrants, rights, corporate debt and notes, municipal bonds, government 
securities, asset-backed securities, depositary receipts and money 
market instruments. As the holder of securities vis a vis issuers, DTC 
receives distributions, dividends, and corporate actions and passes 
them to its Participants.
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    \12\ Available at www.dtcc.com.
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    DTC processes transactions for settlement, subject to its risk 
controls, on the same day it receives them. Distributions on securities 
held at DTC on behalf of its Participants pass through DTC and are 
credited to the accounts of Participants on the same day that they are 
paid to DTC. As a result, DTC's Rules and Procedures are not generally 
affected by the industry's move to T+2.
    However, certain provisions in the Settlement Guide and 
Distributions Guide, respectively, relating to the DTC ID Net Service 
(``ID Net'') \13\ and distributions on securities held at DTC include a 
presumption that transactions settle on a three-day settlement cycle 
(i.e., T+3). This is expected to change as the securities industry 
switches to a standard T+2 settlement cycle in 2017. Pursuant to the 
proposed rule change, DTC would revise the texts of Guides to make 
conforming and technical changes as described below.
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    \13\ ID Net allows DTC Participants that are also members of 
National Securities Clearing Corporation (``NSCC'') to realize 
certain processing efficiencies with respect to institutional 
transactions processed at DTC for which related broker transactions 
are processed through NSCC's Continuous Net Settlement System 
(``CNS''). See Settlement Guide, supra note 5, at 35-43.
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Settlement Guide Changes
    DTC would modify the Settlement Guide relating to ID Net to 
accommodate the eventual move to T+2.
    First, the deadline for submission of affirmed ID Net trades by a 
Matching Utility would be changed to 11:30 a.m. eastern time on 
settlement date minus one (``SD-1'') rather than specifically stating 
the deadline at 9 p.m. on T+2. The move to T+2 necessitates this change 
since ID transactions must enter the ID Net processing on the date 
prior to settlement date to realize processing efficiencies in relation 
to related CNS transactions settling on settlement date, as set forth 
in the Settlement Guide.\14\
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    \14\ Id.
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    Second, the Settlement Guide would be revised to state that ID Net 
Firms may exempt a receive obligation from ID Net before the night of 
SD-1 rather than before the night of T+2 as is currently stated. The 
move to T+2 necessitates this change because transactions are staged 
for ID Net on the night before settlement date.
    DTC would also delete a reference in the Settlement Guide that 
states that ID Net trades must settle in the ``regular way'' and 
defines ``regular way'' as T+3. This provision is obsolete as DTC does 
not include scheduled settlement date as a criteria for ID Net 
processing.
Distributions Guide Changes
    DTC would modify the Distributions Guide text relating to the DTC 
interim accounting process to account for the Shortened Settlement 
Cycle.
    Interim accounting is an important part of the entitlement and 
allocation process relating to distributions. During the interim 
accounting period, DTC facilitates the entitlements and allocation 
process systematically for both the buyer and seller of a transaction 
conducted in the marketplace and submitted to CNS.\15\ The interim 
accounting period is defined as the time period during which a trade 
settling has income or a due bill attached to it.\16\ The due bill 
period is

[[Page 81827]]

determined in accordance with market rules \17\ and currently extends 
for the time from the record date \18\ plus one day up to the ex-date 
plus two days.\19\
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    \15\ Securities movements for transactions processed through CNS 
occur free of payment at DTC. See Settlement Guide, supra note 5, at 
15.
    \16\ In the absence of DTC's interim accounting process, trades 
scheduled to settle after the record date ``with distribution'' 
(those that entitle the receiver to the distribution) would have a 
due bill or income payment that attached to document the entitlement 
and associated obligations between the seller and buyer relating to 
the distribution. The distribution entitlement would then need to be 
handled between the seller and the buyer of the security outside of 
DTC's Distributions Service.
    \17\ E.g., New York Stock Exchange (``NYSE'') Rules 255-259, 
available at http://nyserules.nyse.com/nyse/rules/nyse-rules/chp_1_3/chp_1_3_16/default.asp.
    \18\ The record date is the date when an investor must be on the 
issuer's books as a shareholder to receive a distribution.
    \19\ The ex-date is determined in accordance with the applicable 
market procedures. E.g., NYSE Listed Company Manual, Section 703.03 
(part 2) (Stock Split/Stock Rights/Stock Dividend Listing Process, 
available at http://nysemanual.nyse.com/lcm/Help/mapContent.asp?sec=lcm-sections&title=sx-ruling-nyse-policymanual_703.02(part2)&id=chp_1_8_3_4.
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    In order to prepare for the migration to T+2 settlement, DTC would 
modify the interim accounting process to account for the shortened 
period. In this regard, DTC would revise the Distributions Guide to 
reflect that the interim accounting period would reflect the 
anticipated due bill period that would be recognized by the industry, 
such that the interim accounting period would extend from the record 
date plus one day up to the ex-date plus one day. The proposed change 
to the interim accounting period would be reflected in the text of the 
subsections of the Interim Accounting section of the Distributions 
Guide.
    DTC would also adjust the table in the Distributions Guide which 
describes the date on which certain stock distributions, the timing for 
which are tied to the settlement cycle, are allocated. Specifically, 
the table would be revised for affected distribution types, as follows 
to account for the shortening of the settlement cycle:

------------------------------------------------------------------------
   For this type of distribution \20\    Allocation normally occurs \21\
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Stock dividends with a late ex-date....  On the payable date or ex-date
                                          +32, whichever comes later.
Stock splits, with ex-distribution       For the split shares on ex-date
 beginning on the business day            +32.
 following the payable date.
Stock spinoffs to a DTC-eligible         On the payable date, or ex-date
 security.                                +32, whichever comes later.
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    DTC would also revise the text of the Distributions Guide to make a 
grammatical correction.
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    \20\ Stock distribution types unaffected by the proposed rule 
change are not shown.
    \21\ Bold, strike-through text indicates a deletion. Bold, 
underlined text indicates an addition.
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Implementation Date
    The proposed rule changes to the Guides would not become effective 
until DTC has submitted a subsequent proposed rule change under Rule 
19b-4.\22\ Therefore DTC would not implement the proposed changes until 
an effective date is established by the subsequent proposed rule 
change. DTC anticipates that the implementation date would correspond 
with the industry's transition to a T+2 settlement cycle, which is 
currently anticipated to be in September 2017. It is anticipated by DTC 
that the proposed rule changes to the Guides would become effective 
immediately unless further regulatory action is required.
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    \22\ 17 CFR 240.19b-4.
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2. Statutory Basis
    Section 17A(b)(3)(F) of the Act \23\ requires that the rules of the 
clearing agency be designed, inter alia, to promote the prompt and 
accurate clearance and settlement of securities transactions. DTC 
believes that the proposed rule change is consistent with this 
provision because it would allow ID Net transactions and distributions 
to continue to be processed when the U.S. market standard settlement 
cycle is shortened. Thus, by allowing processing of transactions 
through ID Net and the Distributions Service in accordance with 
standard U.S. settlement timeframes (including when the standard 
settlement cycle is shortened), the proposed rule changes would promote 
the prompt and accurate clearance and settlement of securities 
transactions.
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    \23\ 15 U.S.C. 78q-1(b)(3)(F).
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(B) Clearing Agency's Statement on Burden on Competition

    DTC does not believe that the proposed rule change have any impact 
on competition because the proposed rule change consists of conforming 
and technical changes to the texts of the Guides that would correspond 
with the industry's transition to a T+2 settlement cycle.

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants, or Others

    DTC has not solicited and does not intend to solicit comments 
regarding the proposed rule change. DTC has not received any 
unsolicited written comments from interested parties. To the extent DTC 
receives written comments on the proposed rule change, DTC will forward 
such comments to the Commission.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) \24\ of the Act and paragraph (f) of Rule 19b-4 \25\ 
thereunder. At any time within 60 days of the filing of the proposed 
rule change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.
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    \24\ 15 U.S.C. 78s(b)(3)(A).
    \25\ 17 CFR 240.19b-4(f).
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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:

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-2016-013 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-2016-013. 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

[[Page 81828]]

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 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 filing also will be available for inspection and copying at the 
principal office of DTC 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-2016-013 and should be submitted on or before December 9, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
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    \26\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-27742 Filed 11-17-16; 8:45 am]
 BILLING CODE 8011-01-P