Document ID: SEC-2010-0011-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Depository Trust Co.
Posted Date: 2010-01-05T05:00Z

[Federal Register: January 5, 2010 (Volume 75, Number 2)]
[Notices]               
[Page 497-498]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05ja10-153]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61249; File No. SR-DTC-2009-17]

 
Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing of Proposed Rule Change To Allow The Depository Trust 
Company To Provide Settlement Services to European Central Counterparty 
Limited for U.S. Securities Traded on European Trading Venues

December 29, 2009.
    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 December 17, 2009, 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 primarily by DTC. 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.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The purpose of this proposed rule change is to allow DTC to provide 
settlement services to European Central Counterparty Limited 
(``EuroCCP'') for U.S. securities traded on European trading venues 
(``EuroCCP's U.S. Program'').

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, DTC 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. DTC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of these 
statements.\3\
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    \3\ The Commission has modified the text of the summaries 
prepared by OCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    EuroCCP is a clearing house recognized by the United Kingdom and 
regulated by the Financial Services Authority (``FSA''). It provides 
central counterparty clearance and settlement services to participants 
executing securities transactions on or through European trading 
venues. Several of the trading platforms EuroCCP services are asking 
EuroCCP to begin clearing and settling trades in U.S. equities, 
Exchange Traded Funds (``ETFs''), and American Depositary Receipts 
(``ADRs'').\4\ Trades in these securities would be routed to EuroCCP 
through existing interfaces with the trading platforms and would be 
novated and netted in accordance with EuroCCP's Rules and Procedures. 
EuroCCP would employ its current trade day netting methodology to 
produce a single settlement obligation each day.\5\
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    \4\ The platforms would support trading activity of U.S. issues 
in U.S. dollars. The platforms currently operate from 8 a.m. London 
time to 4:30 p.m. London time.
    \5\ The single settlement obligation calculated by EuroCCP is 
per issue per participant and would settle at DTC on T+3.
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    EuroCCP would like to use DTC's settlement services for these U.S. 
securities transactions by opening and operating an account at DTC. 
EuroCCP participants in the EuroCCP's U.S. Program would be required to 
appoint U.S. settlement agents \6\ to settle obligations on their 
behalf,\7\ and EuroCCP would be subject to the same net debit cap\8\ 
and collateral\9\ controls as any other DTC participant.
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    \6\ These settlement agents would have to be DTC participants.
    \7\ EuroCCP would be given a reason code for the transactions it 
processes through its DTC account. As part of this filing, DTC 
proposes updating its Settlement Service Guide to reflect this 
reason code. In addition, DTC is proposing that the language in the 
Memo Segregation section of the Settlement Service Guide and the 
reason codes that receive Memo Segregation treatment be updated to 
reflect this reason code and to reflect certain other technical, 
non-substantive changes to the reason codes.
    \8\ The net debit cap helps ensure that DTC can complete 
settlement even if a participant fails to settle. Before completing 
a transaction in which a participant is the receiver, DTC calculates 
the resulting effect the transaction would have on such 
participant's account and determines whether the resulting net 
balance would exceed the participant's net debit cap. Any 
transaction that would cause the net settlement debit to exceed the 
net debit cap is placed on a pending queue that recycles until 
another transaction creates credits in such participant's account.
    \9\ DTC tracks collateral in a participant's account through its 
Collateral Monitor (``CM''). At all times, the CM reflects the 
amount by which the collateral in the account exceeds the net debit 
in the account. When processing a transaction, DTC verifies that the 
deliverer's and receiver's CMs will not 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.
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    DTC proposes modifying its Settlement Service Guide in three ways 
to maximize settlement efficiencies for DTC participants acting as U.S. 
settlement agents in the EuroCCP U.S. Program. First, matched reclaims 
to EuroCCP's account would not be allowed. A reclaim is an instruction 
from a participant to DTC to return a delivery. It is generally used in 
the event of an error where a participant does not recognize the 
delivery. DTC's systems attempt to identify a corresponding original 
transaction for every reclaim presented for processing. If the system 
identifies a corresponding original transaction, it processes the 
reclaim as a match.\10\
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    \10\ The following seven elements must be consistent for the 
system to process a reclaim as a match: receiver, deliverer, CUSIP, 
quantity, dollar amount, shares, and settlement date.
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    Under DTC's existing Settlement Service Guide procedures, a 
receiving participant that requests a reclaim to EuroCCP for less than 
$15 million could override DTC's risk management controls for EuroCCP's 
account and create a consequent debit in the EuroCCP account. If DTC 
processed matched reclaims in this fashion, EuroCCP would run the risk 
of overriding its net debit cap, exceeding it liquidity resources, and 
being unable to complete settlement with DTC. To avoid

[[Page 498]]

this outcome, DTC proposes changing its procedures so that reclaims 
under $15 million would not override DTC's risk management controls. 
Instead, such reclaims would recycle until the reclaim can settle 
without violating EuroCCP's net debit cap and collateral controls or 
until the reclaim drops at the recycle cutoff.\11\ This is how DTC 
currently treats reclaims that are over $15 million dollars.
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    \11\ If the reclaim drops at the recycle cutoff, then the 
receiving participant will retain the securities and the debit for 
the delivery it received from EuroCCP.
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    Second, DTC proposes modifying its Settlement Service Guide so that 
pending valued and free transactions to or from the EuroCCP account 
would fail to settle or ``drop'' at 3:10 p.m.\12\ Items that would drop 
include deliveries to EuroCCP failing due to lack of position by the 
delivering participant and items failing DTC's risk management 
controls. This cutoff time would allow EuroCCP to close its business 
day.
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    \12\ DTC's current cutoff time for pending valued transactions 
is 3:10 p.m. and for pending free transactions is 6:35 p.m.
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    Third, the Receiver Authorized Delivery (``RAD'') cutoff time would 
be 3:30 p.m. for both valued and free delivery transactions. DTC's 
current RAD \13\ deadline for valued transactions is 3:30 p.m., but the 
RAD deadline for free delivery transactions is 6:30 p.m. To allow 
EuroCCP to halt transaction processing in the EuroCCP account and end 
its processing day, DTC would require a synchronized RAD cutoff time of 
3:30 p.m. for valued and free delivery transactions.
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    \13\ RAD is a control mechanism which allows a participant to 
review transactions prior to completion of processing. It limits the 
exposure from misdirected or erroneously entered deliver orders, 
payment orders, and pledges.
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    DTC believes the proposed rule changes are consistent with the 
requirements of Section 17A of the Act \14\ and the rules and 
regulations thereunder because the proposed changes would facilitate 
prompt and accurate clearance and settlement of securities transactions 
by leveraging DTC settlement systems to process transactions in U.S. 
securities that are traded on European trading venues.
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    \14\ 15 U.S.C. 78q-1.
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    DTC does not believe that the proposed rule change would impose any 
burden on competition.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants or Others

    Written comments relating to the 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 thirty-five days of the date of publication of this notice 
in the Federal Register or within such longer period (i) as the 
Commission may designate up to ninety days of such date 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 the proposed rule change or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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 e-mail to rule-comments@sec.gov. Please include 
File Number SR-DTC-2009-17 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-DTC-2009-17. This file 
number should be included on the subject line if e-mail 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 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 inspection and 
copying in the Commission's Public Reference Section, 100 F Street, 
NE., Washington, DC 20549-1090, on official business days between the 
hours of 10 a.m. and 3 p.m. Copies of such filings will also be 
available for inspection and copying at the principal office of the DTC 
and on DTC's Web site at http://www.dtcc.com/downloads/legal/rule_
filings/2009/dtc/2009-17.pdf. 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-2009-17 and should be submitted on or before January 
26, 2010.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-31204 Filed 1-4-10; 8:45 am]

BILLING CODE 8011-01-P