Document ID: SEC-2011-0616-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Depository Trust Co.
Posted Date: 2011-05-04T04:00Z

[Federal Register Volume 76, Number 86 (Wednesday, May 4, 2011)]
[Notices]
[Pages 25389-25390]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-10806]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64360; File No. SR-DTC-2011-05]

Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing of Proposed Rule Change To Amend Rules Relating to the 
Memo Segregation Function

April 28, 2011.
    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 15, 2011, The Depository Trust Company (``DTC'') filed with 
the Securities and Exchange Commission (``Commission'') the proposed 
rule change as described in Items I and II below, which Items have been 
prepared primarily by DTC.\3\ 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\ The text of the proposed rule change is attached as Exhibit 
5 to DTC's filing, which is available at http://www.dtcc.com/downloads/legal/rule_filings/2010/dtc/2011-05.pdf.
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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 amend DTC's rules 
relating to its Memo Segregation Service to no longer permit stock loan 
or stock loan return-related turnaround deliveries for a security when 
there is a deficit in the Memo Segregation account.

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.\4\
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    \4\ 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

    Rule 15c3-3 (``Customer Protection Rule''), which was implemented 
by the Commission under the Act, requires, among other things, that 
broker-dealers maintain possession or control of fully-paid or excess 
margin securities they hold for the account of customers.\5\ DTC's Memo 
Segregation Service (``MSEG'') is an optional service which offers a 
mechanism for broker-dealer participants to protect fully-paid or 
excess margin securities by allowing the participant to shield from 
unintended delivery a designated quantity of securities that are in the 
participant's DTC free account or that may be received during the daily 
processing cycle. In this regard, the participant may set a ``counter'' 
for a specified minimum quantity of each security to be held in its 
account as a threshold to any redelivery intraday. When the counter for 
a security is greater than the inventory of the participant, MSEG will 
prevent the delivery of any quantity of the affected security out of 
the participant's account unless: (1) The delivery is a permitted 
delivery (e.g., a free of value ACATS delivery or a ``turnaround'' as 
described below) or (2) the participant provides DTC with new 
instructions to reduce the MSEG counter.
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    \5\ 17 CFR 204.15c3-3.
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    The MSEG procedures currently support two optional ``turnaround'' 
MSEG indicators which enable participants to make deliveries for 
certain transaction types (including, but not limited to, stock loans 
and stock loan returns) from certain positions received intraday 
regardless of any MSEG-related deficit. Recently, DTC was advised by 
the Regulatory and Clearance Committee of the Securities Operations 
Section of SIFMA that several broker-dealer participants had expressed 
concern that their practices for turnaround of stock loans and stock 
loan returns (i.e., MSEG overrides) may be deemed by FINRA to be 
contrary to the Customer Protection Rule. DTC also communicated 
directly with participants affected through their use of this 
functionality, and they expressed similar concerns. In order to 
accommodate its participants in this regard, DTC is therefore proposing 
to revise its procedures so that MSEG would no longer permit stock loan 
or stock loan return-related turnaround deliveries for a security when 
there is an MSEG deficit in the account.
    In order to effect the proposed change described above, DTC will 
amend its Settlement Service Guide (``Service Guide''), which is 
incorporated into DTC's procedures, to make existing indicators that 
allow for the turnaround of stock loans and stock loan returns more 
restrictive. As a result, the

[[Page 25390]]

procedures will no longer permit deliveries for stock loans (designated 
in the Service Guide as Reason Code 10), stock loan returns (Reason 
Code 20), The Options Clearing Corporation (``OCC'') stock loans 
(reason code 260), OCC stock loan returns (reason code 270), American 
Depository Receipt (``ADR'') stock loans (reason code 280), and ADR 
stock loan returns (reason code 290) to be completed from turnaround 
shares when an MSEG deficit exists.\6\
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    \6\ The proposed change will also eliminate references in the 
Settlement Service Guide that MSEG-related functions are processed 
through the Participant Terminal System (PTS), as participants may 
currently use various platforms to communicate with DTC.
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    The proposed rule change is consistent with the requirements of the 
Securities Exchange Act of 1934, as amended, (``Act'') and the rules 
and regulations thereunder applicable to DTC because it modifies a 
service of DTC so that it enables participants to better protect 
customer fully-paid and excess margin securities which are held at DTC 
and in general, protects investors and the public interest.
    In addition, the proposed rule change is consistent with the CPSS-
IOSCO Recommendations for securities settlement systems 
(``Recommendations''). Recommendation 12, ``Protection of Customers' 
Securities,'' states, in relevant part: ``Entities holding securities 
in custody should employ accounting practices and safekeeping 
procedures that fully protect customer's securities.'' Section 3.61 of 
this Recommendation includes the statement that ``one way that a 
customer can be protected in the event of a custodian's insolvency is 
through segregation (identification) of customer securities on the 
books of the custodian (and of all subcustodians, and ultimately, the 
CSD [Central Securities Depository]).'' The term ``custodian'' in this 
context would refer to the participant and not to DTC as we, DTC, 
understand the Recommendations. DTC neither takes direct 
responsibility, as the CSD, for the designation of assets as customer 
assets nor is it required to do so by law or regulation. However, DTC 
accommodates the needs of its participants to segregate (identify) 
customer securities by identifying mechanisms such as MSEG. The MSEG 
proposal is, accordingly, consistent with this Recommendation to the 
extent it applies to DTC. The change will reduce the risk of unintended 
delivery by broker-dealer participants of customer securities, which 
might otherwise be deemed to be contrary to the Customer Protection 
Rule.

(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 forty-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 or disapprove 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-2011-05 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 submission should refer to File Number SR-DTC-2011-05. 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 Web site viewing and 
printing 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 DTC and 
on DTC's Web site at http://www.dtcc.com/downloads/legal/rule_filings/2011/dtc/2011-05.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-2011-05 and should be submitted on or before May 25, 2011.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-10806 Filed 5-3-11; 8:45 am]
BILLING CODE 8011-01-P