Document ID: SEC-2016-1955-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Depository Trust Co.
Posted Date: 2016-11-09T05:00Z

[Federal Register Volume 81, Number 217 (Wednesday, November 9, 2016)]
[Notices]
[Pages 78884-78890]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-27030]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79224; File No. SR-DTC-2016-802]

Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing of and Extension of Review Period of Advance Notice 
Relating to Processing of Transactions in Money Market Instruments

November 3, 2016.
    Pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act entitled the Payment, 
Clearing, and Settlement Supervision Act of 2010 (``Clearing 
Supervision Act'') \1\ and Rule 19b-4(n)(1)(i) under the Securities 
Exchange Act of 1934 (``Act''),\2\ notice is hereby given that on 
September 23, 2016, The Depository Trust Company (``DTC'') filed with 
the Securities and Exchange Commission (``Commission'') the advance 
notice SR-DTC-2016-802 (``Advance Notice'') 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 Advance 
Notice from interested persons and to extend the review period of the 
Advance Notice, for an additional 60 days under Section 806(e)(1)(H) of 
the Clearing Supervision Act.\4\
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    \1\ 12 U.S.C. 5465(e)(1).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ On September 23, 2016, DTC filed this Advance Notice as a 
proposed rule change (SR-DTC-2016-008) with the Commission pursuant 
to Section 19(b)(1) of the Act, 15 U.S.C. 78s(b)(1), and Rule 19b-4, 
17 CFR 240.19b-4. Securities Exchange Act Release No. 34-79046 
(October 5, 2016), 81 FR 70200 (October 11, 2016) (SR-DTC-2016-008).
    \4\ See 12 U.S.C. 5465(e)(1)(H).
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I. Clearing Agency's Statement of the Terms of Substance of the Advance 
Notice

    This Advance Notice consists of modifications to (i) the DTC Rules, 
By-laws and Organization Certificate (``Rules''),\5\ (ii) the DTC 
Settlement Service Guide (``Settlement Guide''),\6\ and (iii) the DTC 
Distributions Service Guide (``Distributions Guide''),\7\ annexed 
hereto as Exhibit 5 (``Proposal''). The Proposal would modify the 
Rules, Settlement Guide, and Distributions Guide to establish a change 
in the processing of transactions in money market instruments (``MMI'') 
that are processed in DTC's MMI Program (``MMI Securities'').\8\ The 
Proposal would affect DTC's processing of issuances of MMI Securities 
(``Issuances'') by issuers of MMI Securities (``Issuers'') as well as 
Maturity Presentments, Income Presentments, Principal Presentments, and 
Reorganization Presentments (collectively, ``Presentments'') (Issuances 
and Presentments, collectively ``MMI Obligations''). The Proposal would 
amend the Rules and Settlement Guide to (i) eliminate intra-day 
reversals of processed but not yet settled MMI Obligations resulting 
from an Issuing and Paying Agent (``IPA'') notifying DTC of its refusal 
to pay (``RTP'') for Presentments of an Issuer's maturing MMI 
Securities for a designated Acronym; \9\ (ii) eliminate the Largest 
Provisional Net Credit (``LPNC'') risk management control; (iii) 
provide that the IPA must acknowledge its funding obligations for 
Presentments and that Receivers of Issuances must approve their receipt 
of those Issuances in DTC's Receiver Authorized Delivery (``RAD'') 
system before DTC would process MMI Presentments; (iv) implement an 
enhanced process to test risk management controls under certain 
conditions with respect to an Acronym (to be referred to as MMI 
Optimization, as defined below); (v) make updates and revisions to the 
Settlement Processing Schedule in the Settlement Guide (``Processing 
Schedule''), as described below, (vi) eliminate the ``receive versus 
payment NA'' control (``RVPNA''), as described below, and (vii) make 
other technical and clarifying changes to the text, as more fully 
described below. In addition, the Proposal would amend the 
Distributions Guide to make changes to text relating to the processing 
of Income Presentments so that it is consistent with the changes 
proposed in the Settlement Guide in that regard, as more fully 
described below.\10\
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    \5\ Available at http://www.dtcc.com/legal/rules-and-procedures.aspx.
    \6\ Available at http://www.dtcc.com/~/media/Files/Downloads/
legal/service-guides/Settlement.pdf.
    \7\ Available at http://www.dtcc.com/~/media/Files/Downloads/
legal/service-guides/
Distributions%20Service%20Guide%20FINAL%20November%202014.pdf.
    \8\ Eligibility for inclusion in the MMI Program covers MMI, 
which are short-term debt Securities that generally mature 1 to 270 
days from their original issuance date. MMI include, but are not 
limited to, commercial paper, banker's acceptances and short-term 
bank notes and are issued by financial institutions, large 
corporations, or state and local governments. Most MMI trade in 
large denominations (typically, $250,000 to $50 million) and are 
purchased by institutional investors. Eligibility for inclusion in 
the MMI Program also covers medium term notes that mature over a 
longer term.
    \9\ Rule 1, supra note 5. MMI of an Issuer are designated by DTC 
using unique four-character identifiers employed by DTC referred to 
as Acronyms. An MMI Issuer can have multiple Acronyms representing 
its Securities. MMI Transactions and other functions relating to MMI 
(e.g., confirmations and RTP) instructed and/or performed by IPAs, 
Participants and/or DTC as described herein are performed on an 
``Acronym-by-Acronym'' basis.
    \10\ Capitalized terms not otherwise defined herein have the 
respective meanings set forth in the Rules, the Settlement Guide, 
and the Distributions Guide.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Advance Notice

    In its filing with the Commission, the clearing agency included 
statements concerning the purpose of and basis for the Advance Notice 
and discussed any comments it received on the Advance Notice. 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 and B below, of the most significant aspects of such 
statements.

(A) Clearing Agency's Statement on Comments on the Advance Notice 
Received From Members, Participants, or Others

    DTC has not solicited and does not intend to solicit comments 
regarding the Proposal. DTC has not received any unsolicited written 
comments from

[[Page 78885]]

interested parties. To the extent DTC receives written comments on the 
Proposal, DTC will forward such comments to the Commission. DTC has 
conducted industry outreach with respect to the proposal including 
discussion with industry associations and IPAs.

(B) Advance Notice Filed Pursuant to Section 806(e) of the Clearing and 
Supervision Act

Nature of the Proposed Change
    DTC is proposing to (i) mitigate risk to DTC and Participants 
relating to intra-day reversals of processed MMI Obligations in the 
event of an IPA's RTP with respect to maturing obligations (``Maturing 
Obligations'') \11\ for an Acronym and/or income payments \12\ relating 
to Presentments for an Acronym, and (ii) reduce blockage for the 
completion of MMI Obligations by eliminating the LPNC control, as more 
fully described below.
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    \11\ A Maturing Obligation is a payment owed in settlement by 
the IPA to the Participant on whose behalf DTC presents the matured 
MMI Securities.
    \12\ Principal and income for an Acronym are distributed by an 
IPA according to a cycle determined by the terms of the issue (e.g., 
monthly, quarterly, and semi-annually). Such distributions may be 
for interest only, principal only, or interest and principal.
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Background
    When an Issuer issues MMI Securities at DTC, the IPA for that 
Issuer sends issuance instructions to DTC electronically, which results 
in crediting the applicable MMI Securities to the DTC Account of the 
IPA. These MMI Securities are then Delivered to the Accounts of 
applicable Participants that are purchasing the Issuance in accordance 
with their purchase amounts. These purchasing Participants typically 
include broker/dealers or banks, acting as custodians for institutional 
investors. The IPA Delivery instructions may be free of payment or, 
most often, Delivery Versus Payment. Deliveries of MMI are processed 
pursuant to the same Rules and the applicable Procedures \13\ set forth 
in the Settlement Guide, as are Deliveries generally, whether free or 
versus payment. Delivery Versus Payment transactions are subject to 
risk management controls of the IPA and Receiving Participants for Net 
Debit Cap and Collateral Monitor sufficiency,\14\ and payment for 
Delivery Versus Payment transactions is due from the receiving 
Participants through DTC's net settlement process. To the extent, if 
any, that the Participant has a Net Debit Balance in its Settlement 
Account at end-of-day, payment of that amount is due to DTC.
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    \13\ Pursuant to the Rules, the term ``Procedures'' means the 
Procedures, service guides, and regulations of the Corporation 
adopted pursuant to Rule 27, as amended from time to time. See Rule 
1, Section 1, supra note 5, at 15. The Procedures applicable to MMI 
settlement processing are set forth in the Settlement Guide. Supra 
note 6.
    \14\ Delivery Versus Payment transfers at DTC are structured so 
that the completion of Delivery of Securities to a Participant in 
end-of-day settlement is contingent on the receiving Participant 
satisfying its end-of-day net settlement obligation, if any. The 
risk of Participant failure to settle is managed through risk 
management controls, structured so that DTC may complete settlement 
despite the failure to settle of the Participant, or Affiliated 
Family of Participants, with the largest net settlement obligation. 
The two principal controls are the Net Debit Cap and Collateral 
Monitor. The largest net settlement obligation of a Participant or 
Affiliated Family of Participants cannot exceed DTC liquidity 
resources, based on the Net Debit Cap, and must be fully 
collateralized, based on the Collateral Monitor. This structure is 
designed so that DTC may pledge or liquidate Collateral of the 
defaulting Participant in order to fund settlement among non-
defaulting Participants. Liquidity resources, including the 
Participants Fund and a committed line of credit with a consortium 
of lenders, are available to complete settlement among non-
defaulting Participants.
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    When MMI Securities mature, the Maturity Presentment process is 
initiated automatically by DTC on maturity date, starting at 
approximately 6:00 a.m. Eastern Time (``ET''), for Delivery of matured 
MMI Securities from the applicable DTC Participants' Accounts to the 
applicable IPA Accounts. This automated process electronically sweeps 
all maturing positions of MMI Securities from Participant Accounts and 
debits the Settlement Account of the applicable IPA for the amount of 
the Maturing Obligations for Presentments for the Acronym and credits 
the Settlement Accounts of the Deliverers. In accordance with the 
Rules, payment is due from the IPA for settlement to the extent, if 
any, that the IPA has a Net Debit Balance in its Settlement Account at 
end-of-day.
    With regard to DTC net settlement, MMI Issuers and IPAs commonly 
consider the primary source of payments for Maturing Obligations of MMI 
Securities to be funded by the proceeds of Issuances of the same 
Acronym by that Issuer on the same Business Day. Because Presentments 
are currently processed automatically at DTC, IPAs have the option to 
refuse to pay for Maturing Obligations to protect against the 
possibility that an IPA may not be able to fund settlement because it 
has not received funds from the relevant Issuer. An IPA that refuses 
payment for a Presentment (i.e., refuses to make payment for the 
Delivery of matured MMI Securities for which it is the designated IPA 
and/or pay interest or dividend income on an MMI Security for which it 
is the designated IPA) must notify DTC of its RTP in the DTC Settlement 
User Interface. An IPA may enter an RTP until 3:00 p.m. ET on the date 
of the affected Presentment.
    Under the current Rules, the effect of an RTP is to instruct DTC to 
reverse all processed Deliveries of that Acronym, including Issuances, 
related funds credits and debits, and Presentments. This late day 
reversal of processed (but not yet settled) transactions may override 
DTC's risk management controls (i.e., Collateral Monitor and Net Debit 
Cap) and force a presenting Participant into a Net Debit Balance; this 
situation poses systemic risk with respect to the Participant's ability 
to fund its settlement and, hence, DTC's ability to complete end-of-day 
net funds settlement. Also, the possibility of intra-day reversals of 
processed MMI Obligations creates uncertainty for Participants.
    Currently, to mitigate the risks associated with an RTP, DTC Rules 
and the Settlement Guide provide for the LPNC risk management control. 
DTC withholds credit intra-day from each Participant that has a 
Presentment in the amount of the aggregate of the two largest credits 
with respect to an Acronym. The LPNC is not included in the calculation 
of the Participant's Collateral Monitor or its Net Debit Balance. This 
provides protection in the event that MMI Obligations are reversed by 
DTC as a result of an RTP.\15\
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    \15\ See Securities Exchange Act Release No. 71888 (April 7, 
2014), 79 FR 20285 (April 11, 2014) (SR-DTC-2014-02) (clarifying the 
LPNC Procedures in the Settlement Guide) and Securities Exchange Act 
Release No. 68983 (February 25, 2013), 78 FR 13924 (March 1, 2013) 
(SR-DTC-2012-10) (updating the Rules related to LPNC).
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    DTC's Rules and Procedures relating to settlement processing for 
the MMI Program \16\ were designed to limit credit, liquidity, and 
operational risk for DTC and Participants. In connection with ongoing 
efforts by DTC to evaluate the risk associated with the processing of 
MMI Obligations, DTC has determined that the risks presented by intra-
day reversals of processed MMI Obligations should be eliminated to 
prevent the possibility that a reversal could override risk controls 
and heighten liquidity and settlement risk. Eliminating intra-day 
reversals of processed MMI Obligations would also enhance intra-day 
finality and allow for the elimination of the LPNC which creates intra-
day blockage and affects liquidity through the withholding of 
settlement credits.
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    \16\ The Procedures applicable to MMI settlement processing are 
set forth in the Settlement Guide. Supra note 6.

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[[Page 78886]]

Proposal
    The Proposal would amend the Rules and the Settlement Guide to 
eliminate provisions for intra-day reversals of processed MMI 
Obligations based on an IPA's RTP or Issuer insolvency. In addition, 
the Proposal would amend the Distributions Guide to make changes to 
text relating to the processing of Income Presentments so that it is 
consistent with the changes proposed in the Settlement Guide in that 
regard, as more fully described below.
    Pursuant to the Proposal, DTC would no longer automatically process 
Presentments (and Issuances and related deliveries). Rather, except as 
noted below, DTC would only process these transactions after an 
acknowledgment (``MMI Funding Acknowledgment'') is made by the IPA to 
DTC whereby either: (i) The value of receiver-approved \17\ Issuances 
alone,\18\ or a combination of receiver-approved Issuances plus an 
amount the IPA(s) has acknowledged has been funded by the Issuer, 
exceeds the Acronym's Presentments; or (ii) the IPA acknowledges it has 
been funded for the entire amount of the gross value of an Acronym, 
regardless of Issuances.\19\
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    \17\ DTC subjects certain transactions to receiver approval in 
its RAD system.
    \18\ An affirmative MMI Funding Acknowledgement by the IPA would 
not be required in the case that the aggregate amount of RAD 
approved Issuances of an Acronym exceeds the aggregate amount of 
Presentments since these Issuances would provide the funding of the 
maturing obligations versus an Issuer having to fund the IPA. The 
Proposal would provide that in this instance, the IPA is deemed to 
provide a standing instruction to process transactions in the 
Acronym, subject to risk management controls. Any such instruction 
or deemed instruction by the IPA would be irrevocable once given.
    \19\ In the case where an affirmative MMI Funding Acknowledgment 
by the IPA would be required for Presentments to be processed, the 
MMI Funding Acknowledgement would be a notification provided by an 
IPA to DTC with respect to an Acronym that the IPA acknowledges and 
affirms its funding obligation for a maturing Acronym either (i) in 
the entire amount of the Acronym or (ii) for an amount at least 
equal to the difference between the value of Issuances and the value 
of the Presentments. In the case of (ii) above, the IPA may (later 
that day) increase the funding amount it acknowledges, but in no 
event may the IPA reduce the amount of its obligation previously 
acknowledged that day.
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    DTC anticipates that the Proposal would generally maintain the 
volume of transactions processed today in terms of the total number and 
value of transactions that have passed position and risk controls 
throughout the processing day. However, because of the requirement for 
the IPA to provide an MMI Funding Acknowledgement prior to processing 
of an Acronym, the reason why transactions do not complete during the 
processing day would shift. It is expected that the value and volume of 
MMI transactions recycling for risk management controls during the late 
morning and afternoon time periods would be reduced as a result of MMI 
transactions being held outside of the processing system awaiting an 
MMI Funding Acknowledgement decision. The non-MMI transactions and 
fully funded MMI transactions would also likely have a reduction in 
blockage from risk management controls as a result of the elimination 
of the LPNC control. The elimination of the LPNC control would no 
longer withhold billions of dollars of settlement credits until 3:05 
p.m. ET as it does today, which would in turn permit these transactions 
to complete earlier in the day.
    An IPA would make an MMI Funding Acknowledgment using a new 
Decision Making Application (``DMA''). When an MMI Funding 
Acknowledgement has occurred, it would constitute the IPA's instruction 
to DTC to attempt to process transactions in the Acronym. At this 
point, if the IPA has acknowledged that it would fully fund the 
Acronym, then the transactions would be sent to the processing system 
and attempted against position and risk management controls. If the IPA 
provides an MMI Funding Acknowledgement for only partial funding of the 
entire amount of Presentments for an Acronym, DTC would test risk 
management controls of Deliverers and Receivers with respect to that 
Acronym to determine whether risk management controls would be 
satisfied by all Deliverers and Receivers of the Acronym and determine 
whether all parties maintain adequate position to complete the 
applicable transactions, i.e., ``MMI Optimization''. In the case that 
the aggregate amount of RAD approved Issuances of an Acronym exceeds 
the aggregate amount of Presentments, and thus an affirmative 
acknowledgment by the IPA would not be required, risk management 
controls for all Deliverers and Receivers would be tested using MMI 
Optimization as well.
    As indicated above, if partial funding from the IPA is necessary, 
then transactions would be routed to MMI Optimization. Generally, in 
MMI Optimization, all Deliverers and Receivers of the Acronym must 
satisfy risk management controls and delivering Participants must hold 
sufficient position, in order for the transactions in that Acronym to 
be processed. However, as long as the Issuances that can satisfy 
Deliverer and Receiver risk controls for that Acronym are equal to or 
greater than the Maturing Presentments of that Acronym, the applicable 
transactions (i.e., those that pass risk controls) would be processed. 
If there are multiple IPAs for an Acronym, DTC would determine funding 
based on the satisfaction of conditions for all Receivers and 
Deliverers with respect to all Presentments, Issuances and applicable 
Delivery Orders in the Acronym and MMI Funding Acknowledgements for all 
IPAs with Issuances and Presentments in the Acronym. No instruction of 
an IPA to DTC to process the subject MMI transactions shall be 
effective until MMI Optimization is satisfied with respect to all 
transactions in the Acronym.
    If there is no MMI Funding Acknowledgment for the IPA for an 
Acronym for which Maturing Obligations are due by 3:00 p.m. ET on that 
day and/or DTC is aware that the Issuer of an Acronym is insolvent 
(``Acronym Payment Failure''), then DTC would not process transactions 
in the Acronym.\20\
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    \20\ DTC would automatically consider an Acronym Payment Failure 
occurring due to an IPA's failure to provide timely MMI Funding 
Acknowledgement (i.e., provide the acknowledgment by 3:00 p.m. ET) 
as an RTP.
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    In the event of an Acronym Payment Failure, DTC would (i) prevent 
further issuance and maturity activity for the Acronym in DTC's system, 
(ii) prevent Deliveries of MMI Securities of the Acronym on failure 
date and halt all activity in that Acronym, (iii) set the Collateral 
Value of the MMI Securities in the Acronym to zero for purposes of 
calculating the Collateral Monitor of any affected Participant, and 
(iv) notify Participants of the Acronym Payment Failure. Notification 
would be made through a DTC broadcast through the current process.
    Notwithstanding the occurrence of an Acronym Payment Failure, the 
IPA would remain liable for funding pursuant to any MMI Funding 
Acknowledgment previously provided for that Business Day.
    A ``Temporary Acronym Payment Failure'' with respect to Income 
Presentments would occur when an IPA notifies DTC that it temporarily 
refuses to pay Income Presentments for the Acronym (typically due to an 
Issuer's inability to fund Income Presentments on that day). A 
Temporary Acronym Payment Failure would only be initiated if there are 
no Maturity Presentments, Principal Presentments and/or Reorganization 
Presentments on that Business Day. DTC expects the Issuer and/or IPA to 
resolve such a situation by the next Business Day. In the event of a 
Temporary Acronym Payment Failure, DTC would (i) temporarily devalue to 
zero all of the Issuer's MMI Securities for purposes of calculating

[[Page 78887]]

the Collateral Monitor, unless and until the IPA acknowledges funding 
with respect to the Income Payments on the following Business Day, (ii) 
notify Participants of the delayed payment through a DTC broadcast as 
is the current process today, and (iii) block from DTC's systems all 
further Issuances and maturities by that Issuer for the remainder of 
the Business Day on which notification of the Temporary Payment Failure 
was received by DTC.
    An IPA would not be able to avail itself of a Temporary Acronym 
Payment Failure for the same Acronym on consecutive Business Days.
    Also, in light of the proposed elimination of intra-day reversals 
of processed MMI Obligations, DTC would also eliminate the RVPNA 
control. The RVPNA control is provided for in the Settlement Guide and 
implements current Section 1(c) of Rule 9(B). RVPNA is used to prevent 
a Participant from Delivering free of value or undervalued any MMI 
Securities received versus payment on the same Business Day.\21\ This 
protects DTC against being unable to reverse transactions for 
Deliveries Versus Payment of MMI Securities in the event of an RTP by 
the IPA.\22\ The elimination of reversals of processed MMI Obligations 
would eliminate the need for the RVPNA control.
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    \21\ For purposes of RVPNA, MMI Securities are considered 
undervalued if they are Delivered Versus Payment for less than 10 
percent below market value.
    \22\ For example, if A Delivers MMI Securities to B versus 
payment and B Delivers the same MMI Securities to C free of payment 
(subject to risk management controls), under Rule 9(B), Section 1, 
the Delivery to C is final when the securities are credited to C. 
DTC would therefore be unable to reverse the Delivery to C and thus 
it cannot reverse the Delivery from B to A.
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Proposed Changes to the Rules, Settlement Guide, and Distributions 
Guide
    DTC would amend the text of Rule 1 (Definitions), Rule 9(A) 
(Transactions in Securities and Money Payments), Rule 9(B) 
(Transactions in Eligible Securities), Rule 9(C) (Transactions in MMI 
Securities), the Settlement Guide and the Distributions Guide to 
reflect the proposed changes described above. Specifically:
    (i) Rule 1 would be amended to:
    a. Delete the definition of LPNC; and
    b. Add a cross-reference to indicate that the terms MMI Funding 
Acknowledgment and MMI Optimization would be defined in Section 1 of 
Rule 9(C).
    (ii) Rule 9(A) would be amended to add text providing that an 
instruction to DTC from a Participant for Delivery Versus Payment of 
MMI Securities pursuant to Rule 9(C) shall not be effective unless and 
until applicable conditions specified in Rule 9(C) as set forth below 
have been satisfied.
    (iii) Rule 9(B) would be amended to:
    a. Eliminate text referencing the LPNC;
    b. Eliminate the provision precluding DTC from acting on an 
instruction for Delivery of MMI Securities subject of an Incomplete 
Transaction if the instruction involves a Free Delivery, Pledge or 
Release of Securities or a Delivery, Pledge or Release of Securities 
substantially undervalued; and
    c. Add text providing that an instruction to DTC from a Participant 
for Delivery Versus Payment of MMI Securities pursuant to Rule 9(C) 
shall not be effective unless and until the applicable conditions 
specified in Rule 9(C) described below have been satisfied.
    (iv) Rule 9(C) would be amended to:
    a. Add the definitions of MMI Funding Acknowledgment and MMI 
Optimization to reflect the meaning of these terms as described above;
    b. Add text that Delivery Versus Payment of MMI Securities would be 
affected in accordance with Rules 9(A), 9(B) and the Settlement Guide 
in addition to Rule 9(C);
    c. Add text indicating that instructions by a Presenting 
Participant for a Presentment or Delivery of MMI Securities would be 
deemed to be given only when any applicable MMI Funding Acknowledgment 
has been received by DTC;
    d. Remove conditions and references relating to reversals of 
processed MMI Obligations;
    e. Set forth conditions for the processing of Presentments, 
including:
    i. The requirement for the IPA to provide an MMI Funding 
Acknowledgment, except in the case where the aggregate amount of 
Issuances exceeds Presentments;
    ii. Satisfaction of risk management controls and RAD;
    iii. That an instruction to DTC with respect to an Issuance or 
Presentment shall become effective upon satisfaction of the provisions 
described in i. and ii. immediately above;
    iv. That DTC shall comply with an effective instruction;
    v. That the IPA acknowledges and agrees that DTC would process 
instructions with respect to Issuances and Presentments as described 
above and that the IPA's obligations in this regard are irrevocable; 
and
    vi. That if the IPA notifies DTC in writing of its insolvency, or 
if DTC otherwise has notice, or if the IPA issues a Payment Refusal for 
the Acronym, then the IPA would not be required to acknowledge its 
obligations and DTC would not be required to process any further 
instructions with respect to the applicable Acronym;
    f. Eliminate references to MMI Securities being devalued in the 
event of an RTP because in the event of any payment failure by the IPA, 
DTC would then revert to the Acronym Payment Failure Process described 
below; and
    g. Delete a reference indicating that DTC's Failure to Settle 
Procedure includes special provisions for MMI Securities.
    (v) The Settlement Guide would be amended to:
    a. Delete the description of, and all references and provisions 
related to, LPNC;
    b. Delete: (A) The definition of RVPNA, (B) a provision that 
transactions for MMI Securities that are deemed RVPNA would recycle 
pending release of the LPNC control at 3:05 p.m. ET, and (C) a note 
that MMI Securities received versus payment are not allowed to be 
freely moved until the LPNC control is released;
    c. Add a description of ``Unknown Rate'' to provide for a 
placeholder in the Settlement Guide for references to an interest rate 
where payment of interest by an IPA to Receivers is scheduled but the 
interest rate to be paid is not known at the time;
    d. Change the heading of the section currently named ``Establishing 
Your Net Debit Cap'' to ``Limitation of Participant Net Debit Caps by 
Settling Banks'' to reflect the context of that section more 
specifically;
    e. Revise the Settlement Processing Schedule to:
    i. Add a cutoff time of 2:30 p.m. ET for an IPA to replace the 
Unknown Rate with a final interest rate and state that the IPA must 
successfully transmit the final rate to DTC before 2:30 p.m. ET;
    ii. Add a cutoff time of 2:55 p.m. ET after which Issuances and 
Presentments cannot be processed on the given Business Day because the 
conditions described above for processing of MMI Obligations have not 
been met;
    iii. Remove a reference for a cutoff relating to reversals of MMI 
Obligations since reversals would no longer occur as described above;
    iv. Define 3 p.m. ET as the cutoff time for any required MMI 
Funding Acknowledgements to be received in order for DTC to be able to 
process for a given Acronym that day;
    v. Add at cutoff time of 3 p.m. ET for an IPA to notify DTC of a 
Temporary Acronym Payment Failure;

[[Page 78888]]

    vi. Delete a reference to the release of LPNC controls as LPNC 
would no longer exist; and
    vii. Clarify that a 3:10 p.m. ET cutoff after which CNS 
transactions that cannot be completed would be dropped from the system, 
also applies to valued transactions in non-MMI Securities and fully 
paid for and secondary MMI Deliveries or Maturity Presentments;
    f. Add a section describing MMI Processing to include a description 
of MMI Funding Acknowledgments and the MMI Optimization process as 
described above;
    g. Revise the section referencing provisions for ``Issuer Failure 
Processing'' to instead describe Acronym Payment Failure Processing and 
Temporary Acronym Payment Failure Process, as these processes are 
described above, since the contingencies for processing a payment 
failure hinge on the failure of payment on an Acronym by an IPA 
regardless of whether it is ultimately caused by an Issuer insolvency 
or otherwise;
    h. Remove a duplicate reference to the DTC contact number for 
Participants/IPAs to call in the event of an Acronym Payment Failure;
    i. Remove the description of the ``MMI IPA MP Pend'' process which 
was designed to allow IPAs to minimize the impact of potential 
reversals of processed MMI Obligations; as such reversals would no 
longer occur; and
    j. Change the name of the section named ``Calculating Your Net 
Debit Cap'' to ``Calculation of Participant Net Debit Caps''.
    (vi) The Distributions Guide would be amended to (i) delete 
language reflecting that Income Presentments are processed at the 
start-of-day, and (ii) add a brief description of the processing of 
Presentments as proposed above and provide a cross-reference to the 
Settlement Guide relating to MMI settlement processing.
    (vii) The Proposal would also make technical and clarifying changes 
to the texts of the Rules and Settlement Guide for consistency 
throughout the texts in describing the concepts and terms set forth 
above, make corrections to grammar and spacing and edit text to provide 
for enhanced readability.
Implementation
    The Proposal would be implemented in phases whereby Acronyms would 
be migrated to be processed in accordance with the Proposal over a 
period of five months beginning in November 2016 and with all Acronyms 
expected to be implemented by the end of March 2017, except for the 
implementation of the elimination of the Rule and Settlement Guide 
provisions relating to RVPNA which elimination would not occur until 
all other aspects of the Proposal are implemented with respect to all 
Acronyms. DTC would announce phased implementation dates for the 
Proposal via Important Notice upon all applicable regulatory approval 
by the Commission.
Expected Effect on Risks to DTC, Its Participants, or the Market
    As described above, the Proposal would amend the Rules and the 
Settlement Guide to: (i) Eliminate provisions for intra-day reversals 
of processed MMI Obligations based on an IPA's RTP or Issuer 
insolvency, (ii) impose a new requirement on IPAs to provide DTC an MMI 
Funding Acknowledgment, (iii) remove the LPNC risk management control; 
and (iv) implement MMI Optimization.
Elimination of Intra-day Reversals
    As noted above, under the current DTC Rules, intraday reversals of 
MMI Obligations may override DTC's risk management controls (i.e., 
Collateral Monitor and Net Debit Cap) and force a presenting 
Participant into an otherwise unanticipated Net Debit Balance at the 
end-of-day; this situation poses systemic risk with respect to the 
Participant's ability to fund its settlement and, hence, DTC's ability 
to complete end-of-day net funds settlement. The proposed elimination 
of intra-day reversals of processed MMI Obligations would decrease risk 
to DTC, its Participants and the marketplace by eliminating the 
settlement risk associated with such reversals, improving settlement 
finality.
IPAs' Obligation To Provide an MMI Funding Acknowledgment
    Pursuant to the Proposal, DTC would no longer automatically process 
Presentments (and Issuances and related deliveries). Rather, as 
applicable, DTC would only process these transactions after receiving 
an MMI Funding Acknowledgment from the IPA. In this regard, once an IPA 
provides an MMI Funding Acknowledgment, its ability to notify DTC of an 
RTP would be limited as it would not be allowed to reduce the amount of 
its obligation previously acknowledged that day.\23\ This provision of 
the Proposal would facilitate the elimination of intra-day reversals, 
as described above, and, therefore, decrease settlement risk for DTC 
and its Participants.
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    \23\ As noted above, an affirmative MMI Funding Acknowledgement 
by the IPA would not be required in the case that the aggregate 
amount of RAD approved Issuances of an Acronym exceeds the aggregate 
amount of Presentments since these Issuances would provide the 
funding of the maturing obligations versus an Issuer having to fund 
the IPA. The Proposal would provide that in this instance, the IPA 
is deemed to provide a standing instruction to process transactions 
in the Acronym, subject to risk management controls. Any such 
instruction or deemed instruction by the IPA would be irrevocable 
once given.
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Removal of the LPNC Control
    Currently, the LPNC control exists to mitigate the risks associated 
with an RTP by withholding credit intra-day from each Participant in 
the amount of the aggregate of the two largest credits with respect to 
Presentment of an Acronym. DTC expects that the proposed elimination of 
the LPNC control and the attendant intraday withholding of credits 
would reduce the risk of intraday liquidity blockages within DTC's 
system for Participant activity, for both MMI and non-MMI transactions, 
because at any point intraday, Participants would have a true view of 
their Net Debit Balances or Net Credit Balances and be able to respond 
accordingly.
MMI Optimization
    As described above, as applicable, DTC would test risk management 
controls of Deliverers and Receivers using the proposed MMI 
Optimization process with respect to the Acronym to determine whether 
risk management controls would be satisfied by all Deliverers and 
Receivers of the Acronym and determine whether all Deliverers maintain 
adequate position to complete the applicable transactions. As described 
above, the application of MMI Optimization to MMI transactions, as 
applicable, would facilitate timely processing of transactions under 
the proposal and reduce the risk to Participants that transactions may 
not settle due to failure to satisfy risk controls.
Management of Identified Risks
    The proposed requirement for an IPA to provide DTC an MMI Funding 
Acknowledgment prior to DTC's processing of affected MMI transactions, 
as applicable, would replace DTC's current automatic processing of MMI 
Transactions. The fact that such transactions would not be processed 
until an MMI Funding Acknowledgment is provided by the IPA may create a 
risk of blockage of MMI transactions by Participants. However, DTC 
anticipates that the various aspects of the Proposal taken together 
would offset any such risk and reduce the risk of blockage overall for 
both MMI and non-MMI transactions because of the effect of (i) the 
removal of the LPNC control would

[[Page 78889]]

eliminate the attendant withholding of settlement credits from 
Participants intraday net settlement balances, and (ii) increased 
efficiency in the testing of risk controls through the MMI Optimization 
process, as described above, would reduce the volume of MMI 
transactions that might otherwise recycle pending passing of risk 
management controls.
Consistency With the Clearing Supervision Act
    DTC believes that the Proposal is consistent with Section 805(b) of 
the Clearing Supervision Act.\24\ The objectives and principles of 
Section 805(b) of the Clearing Supervision Act are the promotion of 
robust risk management, promotion of safety and soundness, reduction of 
systemic risks, and support of the stability of the broader financial 
system.\25\
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    \24\ 12 U.S.C. 5464(b).
    \25\ Id.
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    DTC believes that the Proposal is consistent with the provisions of 
the Clearing Supervision Act because the elimination of reversals of 
MMI transactions would promote intraday settlement finality and protect 
end-of day settlement from the risk of the failure to settle by IPAs or 
affected Participants by removing the risk exposure due to the override 
of DTC's risk management controls (i.e., Collateral Monitor and Net 
Debit Cap) to process reversals under current rules. As such the 
Proposal would promote the robustness of DTC's risk management 
controls.
    DTC also believes that the Proposal is consistent with the 
provisions of the Clearing Supervision Act because the elimination of 
the risk that a Participant could incur a Net Debit Balance that 
exceeds DTC's risk controls caused by an intra-day reversal of 
processed (but not yet settled) MMI Obligations would promote both the 
safety and soundness of DTC's system and reduce systemic risks by (i) 
reducing the risk of a shortfall in a defaulting Participant's 
collateral available for DTC to use to satisfy the defaulting 
Participant's settlement obligations, and (ii) reducing the risk that a 
Participant default could impose a strain on DTC's liquidity resources 
and affect DTC's ability to complete system-wide settlement that day.
    In addition, DTC believes that the Proposal would be consistent 
with Rule 17Ad-22(d)(12) promulgated under the Act.\26\ Rule 17Ad-
22(d)(12) requires that each registered clearing agency shall 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to, as applicable, ensure that final 
settlement occurs no later than the end of the settlement day; and 
requires that intraday or real-time finality be provided where 
necessary to reduce risks.\27\ The Proposal would eliminate the intra-
day reversals of processed MMI transactions that are pending for end of 
day system wide net settlement, thus promoting settlement finality and 
eliminating the possibility that an intraday reversal could heighten 
liquidity and settlement risk, as discussed above. As such, DTC 
believes the Proposal is consistent with Rule 17Ad-22(d)(12).
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    \26\ 17 CFR 240.17Ad-22(d)(12).
    \27\ Id.
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    Taking each of the above points collectively (i.e., the Proposal's 
promotion of robust risk management, safety and soundness, reduced 
systemic risk, and consistency with Rule 17Ad-22(d)(12)). [sic] DTC 
believes the Proposal supports the overall stability of the broader 
financial system consistent with the Clearing Supervision Act.

III. Date of Effectiveness of the Advance Notice and Timing for 
Commission Action

    The proposed change may be implemented if the Commission does not 
object to the proposed change within 60 days of the later of (i) the 
date that the proposed change was filed with the Commission or (ii) the 
date that any additional information requested by the Commission is 
received,\28\ unless extended as described below. The clearing agency 
shall not implement the proposed change if the Commission has any 
objection to the proposed change.
---------------------------------------------------------------------------

    \28\ See 12 U.S.C. 5465(e)(1)(G).
---------------------------------------------------------------------------

    Pursuant to Section 806(e)(1)(H) of the Clearing Supervision 
Act,\29\ the Commission may extend the review period of an advance 
notice for an additional 60 days, if the changes proposed in the 
advance notice raise novel or complex issues, subject to the Commission 
providing the clearing agency with prompt written notice of the 
extension.
---------------------------------------------------------------------------

    \29\ 12 U.S.C. 5465(e)(1)(H).
---------------------------------------------------------------------------

    Here, as the Commission has not requested any additional 
information, the date that is 60 days after DTC filed the Advance 
Notice with the Commission is November 22, 2016. However, the 
Commission finds it appropriate to extend the review period of the 
Advance Notice, for an additional 60 days under Section 806(e)(1)(H) of 
the Clearing Supervision Act.\30\ The Commission finds the Advance 
Notice is both novel and complex because the material aspects of the 
proposed changes to DTC's processing of MMI are detailed, substantial, 
a first for DTC, and are interrelated with other risk management 
practices at DTC.
---------------------------------------------------------------------------

    \30\ Id.
---------------------------------------------------------------------------

    Accordingly, the Commission, pursuant to 806(e)(1)(H) of the 
Clearing Supervision Act,\31\ extends the review period for an 
additional 60 days so that the Commission shall have until January 21, 
2017 to issue an objection or non-objection to the Advance Notice (File 
No. SR-DTC-2016-802).
---------------------------------------------------------------------------

    \31\ Id.
---------------------------------------------------------------------------

    The clearing agency shall post notice on its Web site of proposed 
changes that are implemented.
    The proposal shall not take effect until all regulatory actions 
required with respect to the proposal are completed.\32\
---------------------------------------------------------------------------

    \32\ See supra note 3 (regarding filing of related proposed rule 
change).
---------------------------------------------------------------------------

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the Advance 
Notice is consistent with the Clearing Supervision 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-2016-802 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-2016-802. 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 Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the Advance Notice that are filed 
with the Commission, and all written communications relating to the 
Advance Notice 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

[[Page 78890]]

available for Web site 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 Web site (http://dtcc.com/legal/sec-rule-filings.aspx). 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-2016-802 and should be submitted on or before November 25, 2016.

    By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2016-27030 Filed 11-8-16; 8:45 am]
BILLING CODE 8011-01-P