Document ID: SEC-2008-0238-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Depository Trust Company
Posted Date: 2008-02-13T05:00Z

[Federal Register: February 13, 2008 (Volume 73, Number 30)]
[Notices]               
[Page 8384-8386]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13fe08-150]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57283; File No. SR-DTC-2007-11]

 
Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing of Amendment No. 1 to Proposed Rule Change To Amend 
Its Operational Arrangements as It Applies to Structured Securities

February 6, 2008.
    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 September 7, 2007, The Depository Trust Company (``DTC'') filed with 
the Securities and Exchange Commission (``Commission'') the proposed 
rule change. The proposed rule change was published for comment in the 
Federal Register on November 26, 2007.\3\ The Commission received four 
comments on the original proposal.\4\ On December 14, 2007, DTC filed 
Amendment No. 1 to the proposed rule change.\5\ The filing, as amended, 
is 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, as amended, from 
interested parties.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 34-56795 (November 15, 
2007), 72 FR 66009.
    \4\ Simon Griffiths, Vice President, JP Morgan (December 10, 
2007); Tom Migneron, Principal, Edward Jones (December 11, 2007); 
Dan W. Schneider, Baker & McKenzie LLP, Counsel to the Association 
of Global Custodians, Chicago, Illinois (December 12, 2007); Norman 
Eaker, Chairman, Securities Industry and Financial Markets 
Association, Operations Committee, Gussie Tate, President, 
Securities Industry and Financial Markets Association, Dividend 
Division, and Thomas Hamilton, Vice Chairman, Securities Industry 
and Financial Markets Association, MBS and Securitized Products 
Division Executive Committee (December 19, 2007).
    \5\ Amendment No. 1 replaces and supersedes the original filing 
in its entirety. Amendment No. 1 corrects an inadvertent reference 
to ``issuer'' instead of ``underwriter'' in Section 2(ii).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change seeks approval to amend DTC's 
``Operational Arrangements Necessary for an Issue to Become and Remain 
Eligible for DTC Services'' (``Operational Arrangements'') as it 
applies to Structured Securities. DTC's Operational Arrangements is a 
contractual agreement between DTC, issuers, and paying agents that 
outlines the procedural and operational requirements for an issue to 
become and remain DTC eligible.

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.\6\
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    \6\ The Commission has modified the text of the summaries 
prepared by DTC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The proposed rule change seeks to amend DTC's Operational 
Arrangements as it applies to Structured Securities in order to: extend 
the deadline by which paying agents of such securities must submit 
periodic payment rate information to DTC; establish an exception 
processing fee applied to certain Structured Securities whose features 
prevent paying agents from complying with the extended deadline; and 
provide that DTC track and make publicly available reports on paying 
agent performance as it relates to timeliness and accuracy of 
Structured Securities payment rate information submitted to DTC.
1. Background
    On September 7, 2007, DTC filed with the Commission proposed rule 
change DTC-2007-11. Amendment No. 1 removes reference to the imposition 
of a processing fee on January 1, 2008, and corrects the identity of 
the party that will identify an issue as conforming or non-conforming 
and will submit a written attestation giving the reason for non-
conformance.
    A Structured Security, such as a collateralized mortgage obligation 
or asset-backed security (``ABS''), is a bond backed by a pool of 
underlying financial assets. The underlying assets generally consist of 
receivables such as mortgages, credit card receivables, or student or 
other bank loans for which the timing of principal payments by the 
underlying obligors may be variable and unpredictable. A Structured 
Security may also incorporate credit enhancements or other rights that 
affect

[[Page 8385]]

the amount and timing of payments to investors.
    Communication of periodic payment rates of principal and interest 
(``P&I'') to the end investors in Structured Securities depends on 
application of stringent time frames for information reporting and 
significant interdependencies among servicers of the underlying assets, 
specifically trustees, custodians, paying agents on the securities, 
DTC, and the financial intermediaries that act on behalf of the 
investors. Given the complexity of structure and calculations of cash 
flow from the underlying assets through the issuer to the end investor 
and the interdependencies on timeliness and accuracy of performance 
throughout the chain of servicers and intermediaries, timely and 
accurate submission of payment rate information on Structured 
Securities may be difficult to achieve. As a result, payment rates 
typically are announced late on a significant number of issues, and the 
number of post-payable adjustments made to correct inaccurate payments 
resulting from inaccurate payment rate information is higher than for 
any other security type. Furthermore, the volume of P&I payments for 
Structured Securities processed through DTC has grown rapidly in recent 
years and currently represents approximately 25% of all P&I payments 
processed through DTC. Incorrect and late payment rate reporting causes 
increased operations processing costs, inefficient cash management, and 
loss of income.
    Accordingly, DTC formed a cross-industry working group to study the 
severity of the problem of processing Structured Securities P&I and to 
analyze possible solutions.\7\ In its analysis, the working group 
studied the payment rate reporting history of various Structured 
Securities, noting factors such as paying agent and type of deal 
structure. The working group determined that extending the date by 
which paying agents must submit rate information to DTC would allow a 
greater number of Structured Securities to meet DTC's requirements and 
thus be eligible for DTC services. It also concluded that there is a 
significant subset of Structured Securities for which the paying agent 
may not be able to comply even with an extended time frame for delivery 
of payment rate information because of features inherent in the 
structure of the security issue. It determined these securities should 
be expressly identified and handled as issues that require exception 
processing. Finally, it concluded that paying agent rate reporting 
performance on all Structured Securities should be evaluated and made 
publicly available to participants and other relevant parties. 
Accordingly, DTC proposes to implement the changes set forth below.
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    \7\ The group consisted of representatives from the Securities 
Industry and Financial Markets Association (SIFMA), major paying 
agents, servicers and master servicers, underwriters, and major 
retail and institutional broker-dealers and custodians.
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2. Proposed Amendments to Operational Arrangements
    DTC's Operational Arrangements governs issue eligibility for 
deposit at DTC and issuer and agent obligations regarding servicing of 
the issue thereafter. Regarding notification on issues that pay P&I 
periodically or that pay interest at a variable rate, the Operational 
Arrangements currently requires the paying agent on the security to 
provide payment rate information to DTC preferably five business days 
but no later than two business days prior to the payable date.
(i) Extending the Deadline for Reporting on Payment Detail
    Currently, the majority of Structured Securities have features that 
prevent paying agents from being able to adhere to the current 
Operational Arrangements rate reporting deadline. DTC is proposing to 
amend the Operational Arrangements to require that the payment 
notification regarding Structured Securities be provided to DTC by the 
paying agent preferably five business days but no later than one 
business day prior to the payable date. In addition, DTC will extend 
its current processing deadline for receipt of payment rate files from 
7 p.m. to 11:30 p.m. The extended deadlines should allow paying agents 
to provide rates in a timely and accurate fashion for a majority of 
Structured Securities issues and should permit the securities to remain 
eligible for DTC's services while still providing DTC with adequate 
time to process the information and make timely payments to its 
participants.
(ii) Securities Classifications
    Due to the complexity of certain Structured Securities, it is 
anticipated that the paying agents for certain issues will still not be 
able to meet the amended Operational Arrangements requirements for 
timely payment rate reporting even with the extended reporting 
period.\8\ Therefore, DTC proposes to distinguish between 
``conforming'' and ``non-conforming'' Structured Securities. Non-
conforming Structured Securities will be issues for which the 
underwriter and paying agent have concluded that the security has 
features that will likely preclude the paying agent from submitting 
rate information to DTC in conformity with the requirements of the 
Operational Arrangements. The conforming/non-conforming identification 
will be made at the time the security is made eligible at DTC. For each 
Structured Securities underwriting that the underwriter and paying 
agent identify as non-conforming, the underwriter and paying agent 
shall submit a written attestation giving the reason for non-
conformance. DTC will in turn identify non-conforming Structured 
Securities to participants and other relevant parties and will add an 
indicator to the appropriate DTC systems functions to denote non-
conforming securities. Paying agents also shall be required to evaluate 
their entire portfolio of Structured Securities that have previously 
been made eligible and are currently on deposit at DTC to identify non-
conforming securities.
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    \8\ Although approximately 15% of Structured Security issues 
currently fail to have rates submitted to DTC in a timely manner, it 
is estimated that approximately only half of these have structural 
impediments to meeting the new requirements. Failures in timely rate 
reporting in other instances are believed to be curable by improved 
servicing and reporting on the securities.
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(iii) Exception Processing Fee Applicable to Non-Conforming Securities
    Securities processing inefficiencies and rate inaccuracies 
associated with late payment rate reporting lead to increased costs. In 
order to recoup the increased processing costs, DTC is proposing to 
impose an exception processing fee to the managing underwriter of the 
non-conforming issue at the time of underwriting. No fee will be 
charged retroactively on issues already on deposit at DTC prior to the 
implementation of the fee.
    The exception processing fee of $4,200 per CUSIP was calculated 
based upon anticipated excess costs of P&I processing for non-
conforming Structured Securities. The fee was filed with the SEC as 
part of DTC's annual establishment of fees.\9\
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    \9\ Securities Exchange Act Release No. 34-57193 (January 24, 
2008), 73 FR 5614.
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    The aggregate net amount of the exception processing fees will be 
allocated and rebated on a pro rata basis annually to the DTC 
participants for whom DTC processed Structured Securities P&I 
allocations. For each participant, DTC would compare the participant's 
total number of allocations to the total number of all participants' 
allocations, and the resulting percentage would be applied against the 
total exception processing fund with the

[[Page 8386]]

resulting amount being rebated to the participant. The total exception 
processing fund would be calculated as the sum of all exception 
processing fees less DTC's cost to administer the program.
(iv) Evaluation and Publication of Paying Agent Performance
    DTC is proposing to track and evaluate paying agent performance 
with regard to timeliness and accuracy of payment rate reporting on 
Structured Securities and to make these evaluations available to DTC 
participants and to the public. The purpose of these evaluations is to 
identify poor payment and reporting performance for which a paying 
agent should be able, based on its attestation, to correct any 
underlying servicing issues associated with the payment and information 
flows.
    DTC plans to expand evaluation reports ( ``Report Cards'') that are 
currently used to compare rate submission performance and accuracy of 
Structured Securities paying agents. Currently the Report Cards are 
only distributed among the paying agents being compared. DTC is 
proposing to make the Report Cards available on its Web site. The 
Report Card tracks and reports performance for a given month by paying 
agent with respect to the number of collateralized mortgage obligations 
and asset-backed securities announcements processed, the number of late 
and amended announcements, the payment dollars, late payment dollars, 
and the number of payments and late payments. Timeliness of payment 
rate notification on non-conforming Structured Securities will not be 
included in the proposed paying agent performance evaluation based on 
the paying agent's attestation that the Structured Security is a non-
conforming issue. The other factors will be included with respect to 
both conforming and non-conforming securities.
(v) Conclusion
    In summary, altering the Operational Arrangements to allow paying 
agents additional time in which to report payment rates will allow more 
issues of Structured Securities to be eligible at DTC. Identification 
of issues that cannot meet the proposed extended reporting deadlines 
and reporting on paying agent performance will allow the industry to 
anticipate processing inefficiencies associated with certain Structured 
Securities issues. Furthermore, imposition of an exception processing 
fee on Structured Securities that cannot meet the extended reporting 
deadlines due to deal structure will shift the expense associated with 
these securities to the underwriters and issuers that create the 
structure.
    DTC believes that the proposed rule change is consistent with the 
requirements of section 17A of the Act \10\ and the rules and 
regulations thereunder because the proposed changes removes impediments 
to and perfects the mechanism of a national system for the prompt and 
accurate clearance and settlement of securities transactions.
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    \10\ 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 will have any 
impact or impose any burden on competition.

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

    The Commission received four written comment letters to the 
original proposed rule change, which was published for comment in the 
Federal Register on November 26, 2007.\11\ These comments to the 
proposed rule change and any received to its amended version will be 
summarized and responded to in a future Commission release.
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    \11\ Supra, note 3.
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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 such 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-2007-11 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-DTC-2007-11. 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, on official business days between the hours 
of 10 a.m. and 3 p.m. Copies of such filings also will be available for 
inspection and copying at the principal office of DTC and on DTC's Web 
site at: http://www.dtcc.com/downloads/legal/rule_filings/2007/dtc/2007-11-amendment.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-2007-11 and should be submitted on or before February 28, 2008.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8-2577 Filed 2-12-08; 8:45 am]

BILLING CODE 8011-01-P