Document ID: SEC-2012-0111-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Depository Trust Co.
Posted Date: 2012-01-24T05:00Z

[Federal Register Volume 77, Number 15 (Tuesday, January 24, 2012)]
[Notices]
[Pages 3531-3532]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-1289]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66179; File No. SR-DTC-2011-08]

 Self-Regulatory Organizations; The Depository Trust Company; 
Order Approving Proposed Rule Change To Enhance Risk Management 
Controls Associated With the Receiver Authorized Delivery Function

January 18, 2012.

I. Introduction

    On November 16, 2011, The Depository Trust Company (``DTC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-DTC-2011-08 pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4\2\ 
thereunder. The proposed rule change was published for comment in the 
Federal Register on December 2, 2011.\3\ The Commission received no 
comment letters regarding the proposal. 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\ Securities Exchange Act Release No. 34-65831 (November 28, 
2011), 76 FR 75570 (December 2, 2011). In its filing with the 
Commission, DTC included statements concerning the purpose of and 
basis for the proposed rule change. The text of these statements is 
incorporated into the discussion of the proposed rule change in 
Section II below.
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II. Description

    The rule change will enhance the risk management controls 
associated with DTC's Receiver Authorized Delivery (``RAD'') function. 
The RAD function enables each Participant to control and review a 
Deliver Order (``DO'')\4\ or a Payment Order (``PO'')\5\ that is 
directed to its account by another Participant before its account is 
updated. The RAD function was built in 1990 to route money market 
instrument (``MMI'') transactions for receiver approval. In 1996, there 
was a conversion for all transactions to settle in same-day funds 
subject to the net debit cap control\6\ and collateral controls\7\. Any 
DO that obligated a Participant to pay $15 million or more and any PO 
that obligated a Participant to pay $1 million or more became subject 
to RAD. (In order to minimize blockage, DTC excluded from RAD any DO 
under $15 million and any PO under $1 million.) Transactions in such 
lower amounts were directed to the account of the receiving Participant 
without the RAD filter. For such lower amounts, the receiving 
Participant has the ability on the same day as the original delivery to 
instruct a matched reclaim\8\ transaction not subject to the original 
delivering Participant's collateral monitor and net debit cap controls.
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    \4\ A Deliver Order is the term used to define an instruction 
initiating the book-entry transfer of a security from one DTC 
Participant, as delivering Participant, to another DTC Participant, 
as receiving Participant.
    \5\ A Payment Order is the term used to define an instruction 
initiating a transaction in which a Participant charges another 
Participant for changes in value for outstanding stock loans or 
option contract premiums. Payment orders involve no securities, only 
money.
    \6\ The net debit cap control is designed so that DTC may 
complete settlement even if a Participant fails to settle. Before 
completing a transaction in which a Participant is the receiver of 
securities, DTC calculates the effect the transaction would have on 
such Participant's account and determines whether any resulting net 
debit balance would exceed its net debit cap. Any transaction that 
would cause the Participant net debit balance to exceed the 
Participant's net debit cap is placed on a pending (recycling) queue 
until another transaction creates sufficient credit in such 
Participant's account so that the net debit cap will not be 
exceeded.
    \7\ An example of a collateral control is the Collateral Monitor 
(``CM''). DTC tracks collateral in a Participant's account through 
the CM. At all times, the CM reflects the amount by which the 
collateral value in the account exceeds the net debit balance of the 
account. When processing a transaction, DTC verifies that the CM of 
neither the deliverer nor the receiver will 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 to proceed or until the 
applicable cutoff occurs.
    \8\ A ``reclaim'' is a separate DO or PO that a receiving 
Participant may use to return a DO or PO (typically received in 
error).
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    With this rule filing, DTC is proposing the following revisions to 
RAD:
    (i) DTC will expand RAD to include Omgeo Institutional Delivery 
(``ID'') transactions in excess of $15 million at the receiving 
Participant's election. If no election is made, these transactions will 
be processed for receipt in the same manner as they currently are 
processed. (Currently, ID transactions are not routed to RAD and are 
not subject to matched reclaim.) The change will reduce the receiving 
Participant's risk relating to ID transactions.
    (ii) Participants will be able to elect to have all free MMI 
deliveries bypass RAD on a counterparty by counterparty basis. 
Currently, all free money market instrument (``MMI'') deliveries are 
routed to RAD for receiver approval.\9\ The change will help facilitate 
customer account transfers.
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    \9\ A receiver that authorizes a free MMI transaction is deemed 
to have made an agreement outside of DTC with the deliverer that it 
will make payment outside of DTC in accordance with the agreement of 
the parties. DTC does not monitor or enforce compliance with such 
agreements. Participants must enforce these agreements themselves.
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    (iii) DTC will be able, in its discretion, to apply RAD to all DOs 
and POs initiated by a ``Wind-Down Participant'' \10\ regardless of 
value. A receiving Participant will have the option to raise its RAD 
limit in accordance with its own transaction management objectives (but 
not to reinstitute matched reclaims in lieu of RAD). DTC views this 
improvement as a means for Participants, bilaterally, and DTC, 
multilaterally, to manage liquidity and credit risk in a Wind-Down 
scenario and to eliminate the risk of matched reclaims to a Wind-Down 
Participant.
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    \10\ DTC Rule 32 defines a ``Wind-Down Participant'' and 
provides for actions that may be taken with respect to such a 
Participant.
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    (iv) DTC will exclude from RAD certain receives or deliveries 
(e.g., the

[[Page 3532]]

OCC Market Loan program\11\ account) because these are effectively 
matched and/or approved by other mechanisms.
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    \11\ For more information about the OCC's Market Loan Program, 
see Securities Exchange Release Act No. 34-59298 (January 26, 2009) 
74 FR 5692 (January 30, 2009) [SR-DTC-2008-15].

DTC also seeks to conform the language of its existing procedures 
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pertaining to processing of reclaims to reflect its current practices:

    (v) Receiving Participants may, only on the same day as the 
original delivery, instruct a matched reclaim transaction. Any such 
matched reclaim of a DO with a settlement value of less than $15 
million and a PO with a value less than $1 million may be processed 
without reference to the collateral monitor and net debit cap controls 
for the original delivering Participant.\12\
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    \12\ For more information regarding this change, see Securities 
Exchange Release Act No. 34-48121 (July 2, 2003) 68 FR 41030 (July 
2, 2003) [SR-DTC-2003-06].
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III. Discussion

    Section 19(b)(2)(B) of the Act 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 the rules and regulations thereunder applicable to such 
organization.\13\ In particular, Section 17A(b)(3)(A)\14\ of the Act 
requires, among other things, that the clearing agency be so organized 
and have the capacity to safeguard the securities and funds which are 
in the custody or control of such clearing agency or for which it is 
responsible.
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    \13\ 15 U.S.C. 78s(b)(2)(B).
    \14\ 15 U.S.C. 78q-1(b)(3)(A).
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    Because the proposed change would allow DTC to enhance the risk 
management controls associated with the RAD function to reduce 
Participant counterparty risk, to enhance DTC's liquidity management, 
and to facilitate customer account transfers, the Commission believes 
that the proposed rule change is consistent with DTC's obligations 
under the Act to safeguard securities and funds in its possession or 
control for which it is responsible.

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and in 
particular with the requirements of Section 17A of the Act and the 
rules and regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) \15\ of the 
Act, that the proposed rule change (File No. SR-DTC-2011-08) be, and 
hereby is, approved.\16\
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    \15\ 15 U.S.C. 78s(b)(2).
    \16\ 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).
    \17\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-1289 Filed 1-23-12; 8:45 am]
BILLING CODE 8011-01-P