Document ID: SEC-2021-0654-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Depository Trust Co.
Posted Date: 2021-05-06T04:00Z

[Federal Register Volume 86, Number 86 (Thursday, May 6, 2021)]
[Notices]
[Pages 24418-24420]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-09526]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91736; File No. SR-DTC-2021-007]

Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
To Update the DTC Corporate Actions Distributions Service Guide

April 30, 2021.
    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 April 20, 2021, 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) of the Act \3\ and Rule 19b-
4(f)(4) thereunder.\4\ The Commission is 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 consists of changes to the rules of DTC 
(``Rules''), as described in greater detail below.\5\
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    \5\ Terms not defined herein are defined in the Rules, available 
at http://dtcc.com/~/media/Files/Downloads/legal/rules/
dtc_rules.pdf.
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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
    This proposed rule change would update the DTC Corporate Actions 
Distributions Service Guide (``Distributions Guide'') to (i) direct 
Participants to use DTC's ClaimConnect\TM\ service instead of DTC's 
Adjustment Payment Order (``APO'') service to make manual, Participant-
to-Participant, cash adjustment claims to principle and interest 
(``P&I'') payments on stock loan and repurchase agreement (``repo'') 
positions (hereinafter, ``manual adjustments''), and (ii) correct a 
misspelled word in the Distributions Guide.
    Currently, the APO service is used, among other things, to make 
manual adjustments. A manual adjustment is one that is initiated by one 
of the parties (i.e., a Participant) to a stock loan or repo against 
the other party (i.e., another Participant), as compared to an 
automated adjustment made directly by DTC. A manual adjustment can be 
necessary where, for example, there is a transaction discrepancy with 
the stock loan or repo, or an agreement between the parties provides 
for an adjustment unknown to DTC. The parties can settle the adjustment 
away from DTC or one of the parties can submit a manual adjustment via 
the APO service.
    Unfortunately, manual processing of adjustments via the APO service 
is subject to a number of shortcomings. For example, the adjustments 
are not subject to DTC's risk controls,\6\ which can unexpectedly 
subject the receiving party to the value of the adjustment; \7\ they 
lack a unique identifier, which can make reconciling claims difficult; 
there is no automated notification process, so Participants need to 
actively monitor for manual adjustments; there is no dashboard where 
Participants can see all of their adjustments, nor is there reporting 
or search capabilities on adjustments; only one party to the stock loan 
or repo can submit a manual adjustment at a time; and there is not a 
validation or matching process, which means the parties often need to 
submit multiple adjustments between each other before reaching final 
agreement.
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    \6\ DTC's risk management systems are designed to mitigate 
credit and market risk by monitoring, in real time, the projected 
settlement activity of Participants, including intraday application 
of the Collateral Monitor and Net Debit Cap. These two controls work 
together to protect the DTC settlement system in the event of a 
Participant default. The Collateral Monitor requires net debit 
settlement obligations, as they accrue intraday, to be fully 
collateralized. Meanwhile, the Net Debit Cap limits the amount of 
any Participant's net debit settlement obligation to the amount that 
can be satisfied with DTC liquidity resources (i.e., the 
Participants Fund and the committed line of credit from a consortium 
of lenders).
    \7\ Although manual adjustments are not subject to DTC's risk 
controls, the potential debit or credit value that a party could be 
unexpectedly subject to is limited to only the value of the 
adjustment, which is relatively small compared to Participants' end-
of-day net settlement amounts.
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    To address these shortcomings and others, DTC proposes to no longer 
allow Participants to use the APO service to make manual adjustments. 
Instead, Participants would be directed to use ClaimConnect in order to 
continue to make manual adjustments through DTC.
    ClaimConnect was established in 2020 \8\ as an optional DTC service 
that enables Participants to bilaterally match and settle cash claim 
transactions through DTC.\9\ More specifically,

[[Page 24419]]

ClaimConnect is a validation and matching engine that continually 
monitors claims throughout their lifecycle in order to settle and close 
claims through DTC's settlement process.\10\ Claims can be matched 
manually (i.e., Affirmed) by ClaimConnect users or automatically (i.e., 
Automatched) by the ClaimConnect service when it matches two like 
claims based on the alignment of certain data elements. Once matched, 
claims are settled through systematic Securities Payment Orders 
(``SPOs'') generated and submitted by ClaimConnect at set times, 
intraday, on a settlement date.\11\
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    \8\ See Securities Exchange Act Release No. 90481 (November 23, 
2020), 85 FR 76640 (November 30, 2020) (SR-DTC-2020-012).
    \9\ See ClaimConnect Service Guide available at https://www.dtcc.com/-/media/Files/Downloads/legal/service-guides/ClaimConnect.pdf. With respect to ClaimConnect, a cash claim or cash 
claim transaction is a cash entitlement (i.e., a request for cash) 
from one Participant to another Participant. Typically, cash claims 
arise as a result of trading exceptions from a Corporate Action 
event, where a cash entitlement needs to be delivered from one 
holder to another. Trading exceptions include, but are not limited 
to, trades outside of the market's agreed upon settlement cycle, 
lack of due bill fail tracking, stock loan or repo transaction 
discrepancy, or tax treaty differences.
    \10\ See ClaimConnect Service Guide, supra note 9.
    \11\ Id.
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    There would be several benefits to using ClaimConnect, in lieu of 
the APO service, to make manual adjustments at DTC. For example, 
adjustment claims in ClaimConnect would be subject to DTC's risk 
controls and would have a unique identifier that Participants could 
track, report on, and query via the Participant's ClaimConnect 
dashboard. ClaimConnect also permits both parties to an adjustment to 
submit a claim at the same time, and it would notify the parties when 
an adjustment was submitted. Moreover, because adjustments would be 
validated and matched in ClaimConnect, either automatically by the 
ClaimConnect service or manually by the parties, the parties would not 
need to submit multiple adjustments to reach agreement.
    Additionally, DTC believes that manual adjustments via ClaimConnect 
would be cheaper than via the APO service. Although ClaimConnect costs 
$1.75 per side, per-matched claim (i.e., both parties to a claim are 
charged $1.75, for a total of $3.50, once the claim is confirmed),\12\ 
whereas an APO adjustment only costs $1.50 per adjustment, not per side 
(i.e., only the party that submits the adjustment is charged 
$1.50),\13\ because there is no validation and matching process for APO 
adjustments, the parties often need to submit multiple APO adjustments 
between each other before reaching final agreement. Therefore, the 
total cost for a manual adjustment via the APO service routinely 
exceeds $3.50. With ClaimConnect, however, because there would be a 
validation and matching process for each adjustment claim, only one 
adjustment would be necessary.
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    \12\ Fee ID 710, Guide to the DTC Fee Schedule (``Fee Guide''), 
available at http://www.dtcc.com/-/media/Files/Downloads/legal/feeguides/dtcfeeguide.pdf.
    \13\ Fee ID 709, Fee Guide, supra note 8.
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    In addition to updating the Distributions Guide regarding the above 
described changes for manual adjustments, an update would be made to 
correct a misspelling in the Guide's ``Interim Accounting'' section. 
Specifically, the word ``include'' would be changed to ``included'' 
(emphasis added).
    To effectuate this proposed rule change, (i) the ``Correcting P&I 
Payments on Stock Loan Positions'' and the ``Correcting REPO 
Positions'' subsections of the Distributions Guide would be updated to 
direct Participants to use ClaimConnect instead of the APO service to 
make manual adjustments, and (ii) the ``With DTC's Interim Accounting'' 
subsection of the Guide would be update to correct the misspelling 
described above.
Effective Date
    The proposed change to no longer allow Participants to use the APO 
service to submit manual adjustments but, instead, require Participants 
to use ClaimConnect for manual adjustments processed through DTC would 
become effective July 9, 2021. Participants will be notified by 
Important Notice, posted on DTC's website. Separately, the proposed 
change to correct the misspelling describe above would be made promptly 
following Commission approval.
2. Statutory Basis
    Section 17A(b)(3)(F) of the Act,\14\ 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 of the Act.
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    \14\ 15 U.S.C. 78q-1(b)(3)(F).
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    As described above, the proposal would update the Distributions 
Guide to direct Participants to use ClaimConnect instead of the APO 
service to make manual adjustments. By no longer allowing manual 
adjustments via the APO service and, instead, requiring Participants to 
use ClaimConnect, if they wish to have manual adjustments processed 
through DTC, the proposal not only addresses the various shortcomings 
of using the APO service for such adjustments, as described above, but 
also continues to provide a means for Participants to process manual 
adjustments through DTC. Moreover, ClaimConnect is simply a better 
platform for processing manual adjustments, given its superior 
functionality, as noted above and described in detail in the 
ClaimConnect Service Guide.\15\ In short, DTC believes this change 
would improve the processing and settlement of manual adjustments.
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    \15\ See ClaimConnect Service Guide, supra note 9.
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    The proposal also would correct a misspelled word in the ``Interim 
Accounting'' section of the Distributions Guide, as described above. By 
correcting the misspelling, the proposal would improve the Guide's 
clarity for Participants regarding DTC's interim accounting process, 
alleviating any confusion that the error may have caused.
    For these reasons, DTC believes that the proposed rule change helps 
promote the prompt and accurate clearance and settlement of securities 
transactions, consistent with Section 17(A)(b)(3)(F) of the Act.\16\
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    \16\ Id.
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(B) Clearing Agency's Statement on Burden on Competition

    DTC does not believe that the proposed change to update the 
Distributions Guide to direct Participants to use ClaimConnect instead 
of the APO service to make manual adjustments will have any impact on 
competition because Participants would continue to have the option to 
submit manual adjustments through DTC, albeit via ClaimConnect instead 
of the APO service. If anything, DTC believes this proposed change may 
promote competition because, as noted above, ClaimConnect would be a 
superior platform for processing manual adjustments and, as also noted 
above, it may prove to be a cheaper option than using the APO service. 
Any time or resources Participants save by using ClaimConnect instead 
of the APO service could be directed to other endeavors.
    Meanwhile, DTC does not believe the proposed correction to the 
misspelled word in the Distributions Guide will have any impact on 
competition because it will simply correct a typographical error.

[[Page 24420]]

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

    Written comments relating to this proposed rule change have not 
been solicited or received. DTC will notify the Commission of any 
written comments received by DTC.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.
    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) \17\ of the Act and paragraph (f) \18\ of Rule 19b-4 
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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    \17\ 15 U.S.C 78s(b)(3)(A).
    \18\ 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-2021-007 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-2021-007. 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 post all comments on 
the Commission's internet website (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 website 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 website 
(http://dtcc.com/legal/sec-rule-filings.aspx). All comments received 
will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-DTC-2021-007 and should be submitted on 
or before May 27, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-09526 Filed 5-5-21; 8:45 am]
BILLING CODE 8011-01-P