Document ID: SEC-2018-1889-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Depository Trust Co.
Posted Date: 2018-12-12T05:00Z

[Federal Register Volume 83, Number 238 (Wednesday, December 12, 2018)]
[Notices]
[Pages 63948-63952]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-26913]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84751; File No. SR-DTC-2018-010]

Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing of a Proposed Rule Change To Amend the Settlement 
Guide Procedures To Provide Status Information for Institutional 
Transactions To a Matching Utility

December 7, 2018.
    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 November 29, 2018, 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 by the clearing agency. 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. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change would amend the Procedures, set forth in 
the DTC Settlement Guide,\3\ \4\ to allow DTC to provide status 
information (``Status Information'') for institutional transactions in 
Eligible Securities (``Institutional Transactions'') \5\ to an entity 
providing a matching service \6\

[[Page 63949]]

(``Matching Utility''), as described below.
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    \3\ Each capitalized term not otherwise defined herein has its 
respective meaning as set forth in the Rules, By-Laws and 
Organization Certificate of The Depository Trust Company 
(``Rules''), available at http://www.dtcc.com/legal/rules-and-procedures.aspx and the DTC Settlement Service Guide (``Settlement 
Guide''), available at http://www.dtcc.com/~/media/Files/Downloads/
legal/service-guides/Settlement.pdf.
    \4\ The Settlement Guide, which is proposed to be amended 
hereby, sets forth Procedures for the DTC's Settlement Service. See 
Settlement Guide, supra note 3. Procedures, in this context, 
pursuant to Section 1 of Rule 1, means ``the Procedures, service 
guides, and regulations of DTC adopted pursuant to Rule 27, as 
amended from time to time.'' Rule 1, Section 1, supra note 3. The 
Settlement Guide constitutes Procedures of DTC, as defined in the 
Rules. See Settlement Guide, supra note 3 at 1.
    \5\ An Institutional Transaction is a securities transaction 
between a broker-dealer and its institutional customer (e.g., sell-
side firms, buy-side institutions, and custodians).
    \6\ A ``matching service'' is an electronic service to match 
trade information, centrally, between a broker-dealer and its 
institutional customer. The matching service intermediary matches 
(i.e., reconciles) trade information from the counterparties to an 
Institutional Transaction, to generate an affirmed transaction 
(``Affirmed Transaction'') which is then used to provide settlement 
instructions for the Affirmed Transactions to the central securities 
depository, such as DTC, at which the Affirmed Transaction settles. 
See Securities Exchange Act Release No. 39829 (April 6, 1998), 63 FR 
17943 (April 13, 1998) at 17946 (providing interpretive guidance on 
types of entities that may provide a matching service).
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, the clearing agency 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. The clearing agency has prepared summaries, 
set forth in sections A, B, and C below, of the most significant 
aspects of such statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

1. Purpose
    The proposed rule change would amend the Settlement Guide to allow 
DTC to provide Status Information for Institutional Transactions to a 
Matching Utility, as described below.
Background
    DTC may accept Institutional Transactions from a Matching Utility 
that is (i) a clearing agency registered pursuant to Section 17A of the 
Act \7\ (ii) an entity that has obtained an exemption from such 
registration from the Commission, or (iii) a ``qualified vendor'' for 
trade confirmation/affirmation services as defined by the rules of a 
self-regulatory organization.\8\
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    \7\ 15 U.S.C. 78q-1.
    \8\ See Settlement Guide, supra note 3 at 35.
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    In accordance with the Settlement Guide, for a Matching Utility to 
establish and maintain a connection with DTC, the Matching Utility must 
be able to balance with DTC in an automated way \9\ and communicate 
transactions to and from DTC with information required though mandated 
fields in order to provide DTC with data necessary for it to be able to 
process a transaction.\10\
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    \9\ For each Matching Utility interfacing with DTC, DTC requires 
the Matching Utility to deliver a daily message on each business day 
shortly after noon from the Matching Utility with their accepted 
item counts of institutional delivery and ID Net transaction totals 
for Settlement Date minus one transactions. DTC's system will 
compare the totals from the Matching Utility to its accepted item 
counts. If the totals match, an ``acknowledged balance'' balance 
file will be sent to the Matching Utility. If the totals do not 
match, DTC will respond with the list of Settlement Date minus one 
control numbers received from the Matching Utility, along with their 
respective transaction types for the originating Matching Utility to 
compare. Id.
    \10\ The mandated fields for this purpose are the transaction 
control number (``Control Number''), DTC receiver and deliverer 
account numbers, CUSIP, message type, share quantity, market type, 
buy-sell indicator, broker ID, ID agent internal account number, 
broker internal account number, agent bank ID, settlement amount, 
origination entity, recipient of message, institution, and 
settlement date. Id. Institutional Transactions that are not 
Affirmed Transactions, but which include a Control Number, may be 
submitted directly by Participants.
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    The submission of an Affirmed Transaction by the Matching Utility 
to DTC, on behalf of a Participant, constitutes the duly authorized 
instruction of the Participant to DTC to process the Affirmed 
Transaction in accordance with the Rules and Procedures.\11\
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    \11\ Id.
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    As more fully described below, a transaction submitted to DTC for 
processing may be subject to a processing exception (``Exception''), 
causing it to pend in the DTC system or not be processed because the 
transaction does not satisfy certain requirements and/or controls set 
forth in the Rules and Service Guide. A Matching Utility that has 
submitted an Institutional Transaction to DTC, or is otherwise involved 
with the matching of a transaction, does not receive Status Information 
regarding the transaction and is therefore unable to provide services 
to facilitate resolution of processing Exceptions occurring at DTC. 
Therefore, in order to resolve an Exception, the Participants to an 
Institutional Transaction must (i) access Status Information directly 
through the DTC Settlement User Interface and (ii), as necessary, 
supply the information to their customers that are counterparties to 
the transaction on their books, in order to facilitate the coordination 
of the resolution of the Exception among the counterparties. Pursuant 
to the proposed rule change, DTC would amend the Settlement Guide to 
allow DTC to provide Status Information for an Institutional 
Transaction to a Matching Utility. The proposal would allow the 
Matching Utility to further provide the Status Information to the 
counterparties to the Institutional Transaction to facilitate 
coordination of the resolution of Exceptions among counterparties.\12\
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    \12\ The proposed rule change would not change or have any 
effect on Participants' ability to continue to access Status 
Information directly through the DTC Settlement User Interface.
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DTC Transaction Processing Exceptions
    Exceptions may arise at various points during the processing of an 
Institutional Transaction submitted to DTC.
    After an Affirmed Transaction, or other transaction that has been 
submitted directly by a Participant, has been accepted by DTC, the 
transaction must be approved by the Receiver through the Receiver 
Authorized Delivery function (``RAD''), before it will be staged for 
DTC settlement processing in accordance with the Rules and the 
Settlement Guide.\13\ In this regard, a Receiving Participant may 
reject a transaction for any reason using RAD. If a transaction is not 
processed because of a rejection, then the transaction will drop from 
the DTC system, resulting in an Exception that could only be resolved 
through resubmission of the transaction and approval by the Receiving 
Participant.\14\
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    \13\ RAD allows Participants to review and either approve or 
reject incoming Deliveries before they are processed. See Settlement 
Guide, supra note 3 at 53. RAD limits a Participant's exposure from 
misdirected or erroneously entered transactions. See Settlement 
Guide, supra note 3 at 5.
    \14\ See Settlement Guide, supra note 3 at 54-55.
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    When processing a transaction for settlement, DTC checks risk 
controls, including the Net Debit Cap and Collateral Monitor, and 
inventory controls of the Participants to the transaction.\15\ If a 
transaction satisfies DTC risk and inventory controls, as described 
below, the transaction will be processed by DTC and will become 
complete if the Receiving Participant satisfies its end-of-day funds 
settlement obligation.\16\ If a transaction is not processed, i.e., 
because DTC risk controls are not met, or if the Deliverer has 
insufficient inventory in the applicable Securities, this would result 
in an Exception such that the transaction will pend in DTC's system and 
recycle until the condition causing the pend is satisfied.\17\
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    \15\ See Settlement Guide, supra note 3 at 64-68.
    \16\ See Rules 9(A) and 9(B), supra note 3.
    \17\ See Settlement Guide, supra note 3 at 55.
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    An incomplete transaction recycles in DTC's system until the end of 
the day, and if it remains incomplete at the end of the day it will be 
dropped.\18\
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    \18\ See Settlement Guide, supra note 3 at 55.
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Addressing Exceptions
    An Exception creates inefficiencies for parties to the applicable 
Institutional Transaction. If an Institutional Transaction results in 
an Exception, information regarding the status of the Institutional 
Transaction may need to be exchanged by Participants and others 
involved in the trade life cycle, including buy-side firms, broker/

[[Page 63950]]

dealers, custodians, prime brokers, clearing brokers and other 
settlement agents, to resolve the issue underlying the Exception and 
successfully process the transaction. Communications among Participants 
that have direct access to Status Information through DTC and other 
counterparties regarding Exceptions are often processed in a 
decentralized manner via email, creating a time consuming process that 
is subject to error.
    Any potential delays and/or errors in communicating the existence 
of an Exception and related Status Information among counterparties may 
impede the prompt and accurate clearance and settlement of affected 
Institutional Transactions. A Participant's timely receipt of 
information relating to an Exception would facilitate its ability to 
take an action to facilitate the processing of the related transaction. 
Examples of some of the actions the Participant may take include, as 
applicable, (i) making a settlement progress payment (``Settlement 
Progress Payment'') \19\ to lower its net settlement debit and increase 
its Collateral Monitor in order to meet the DTC Net Debit Cap and 
Collateral Monitor risk controls, (ii) managing the Securities in its 
Account to increase its available Collateral, and/or (iii) 
communication with counterparties to the transaction with respect to a 
rejection so that the Deliverer and Receiver may agree on the details 
for any related transaction to be submitted and approved via RAD.
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    \19\ A Settlement Progress Payment is a payment wired intraday 
by a Participant to DTC's account at the Federal Reserve Bank of New 
York. The amount of a Settlement Progress Payment is (i) credited to 
the Participant's intraday net settlement balance and (ii) is 
Collateral that supports the Participant's Collateral Monitor. See 
also Rule 1, supra note 3 (definition of Collateral) and Settlement 
Guide, supra note 3 at 62-63.
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Proposed Rule Change
    DTC has received a request from its Matching Utility affiliate, ITP 
Matching (US) LLC (``ITP''), to receive Status Information so that ITP 
may transmit the Status Information to counterparties in a centralized 
format. DTC believes that distribution of Status Information to 
relevant counterparties in a centralized format would facilitate 
Participants' ability to monitor Exceptions and coordinate with their 
institutional customers in order to resolve Exceptions.
    Pursuant to the proposed rule change, in order to facilitate more 
seamless transmission of the Status Information for (i) Affirmed 
Transactions and (ii) other Institutional Transactions that may have 
been confirmed at a Matching Utility and received a Control Number, and 
are submitted directly to DTC by a Participant in an instruction 
containing the Control Number, (collectively, ``Eligible 
Transactions'') to Participants and facilitate their ability to manage 
Exceptions, DTC proposes to amend the Settlement Guide to provide that 
DTC may provide Status Information on Eligible Transactions to the 
applicable Matching Utility that submitted the transaction to DTC, or 
with respect to which its Control Number is included in transaction 
details provided by a Participant,\20\ if so requested by the Matching 
Utility. In this regard, DTC would send to a Matching Utility Status 
Information for Eligible Transactions that DTC has received from the 
Matching Utility or have been entered by the Participant, that have a 
Control Number associated with that Matching Utility. The Status 
Information provided to the Matching Utility would include the status 
of the transaction (e.g., the Delivery of Securities has been made 
within DTC, the transaction is pending Delivery within DTC, or the 
transaction was reclaimed (i.e., sent back to the Deliverer)) and a 
reason for any pending status (e.g., the Deliverer has insufficient 
inventory in the applicable Securities, the Deliverer has insufficient 
Collateral, the Receiver to the transaction has insufficient Net Debit 
Cap, etc.). The Status Information would also include information 
(``Identifying Information'') to facilitate the Matching Utility's 
ability to identify the applicable Eligible Transaction and reconcile 
the Status Information to the Eligible Transaction in its records. 
Identifying Information would include, but not be limited to, (i) the 
applicable Control Number (ii) identification numbers of the 
Participants to the transaction, (iii) quantity of Securities, (iv) 
dollar amount of the transaction, and (v) an indicator of whether the 
transaction was submitted to DTC by the Matching Utility or directly by 
a Participant.
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    \20\ It is DTC's understanding that a transaction that has been 
confirmed within a Matching Utility's system, but has not been 
affirmed, may be assigned a Control Number by the Matching Utility. 
Any transaction not affirmed by a Matching Utility would not be 
submitted by it to DTC as an Affirmed Transaction. In that case, the 
Participant may submit the transaction directly through DTC as a 
Deliver Order, and include the applicable Control Number as assigned 
by the Matching Utility on its submission to DTC.
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    DTC believes that sharing Status Information with a Matching 
Utility, on behalf of a Participant, would foster coordination among 
persons engaged in the clearance and settlement of Institutional 
Transactions by facilitating enhanced access to information for 
relevant parties that may promote their ability to manage Exceptions.
Proposed Changes to the Settlement Guide
    Pursuant to the proposed rule change, DTC proposes to revise the 
Settlement Guide to allow DTC to provide Status Information of (i) 
Affirmed Transactions and (ii) other institutional transactions to a 
Matching Utility that requests such information, but only for those 
transactions that are associated with a Control Number relating to the 
Matching Utility. The proposed text to the Settlement Guide would also 
(x) describe the types of Status Information and related Identifying 
Information that would be shared with a Matching Utility in this 
regard, as described above and (y) provide that DTC may charge a fee 
(``Status Information Fee'') to a Matching Utility that receives Status 
Information as set forth in the DTC Fee Guide.\21\ The proposed rule 
change would also add a defined term for ``Control Number'' to the 
Settlement Guide in existing text where the term is referred to but not 
defined.
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    \21\ Available at http://www.dtcc.com/~/media/Files/Downloads/
legal/fee-guides/dtcfeeguide.pdf. Any such fee would be the subject 
of a subsequent proposed rule change that DTC would file with the 
Commission.
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    The proposed rule change would require that prior to providing 
Status Information to a Matching Utility, DTC would obtain the written 
agreement, in such form as determined by DTC from time to time 
(``Status Information Agreement''), from the Matching Utility that 
includes (i) a request from the Matching Utility to receive Status 
Information from DTC, (ii) an agreement by the Matching Utility that 
the Matching Utility will not distribute Status Information to any 
third party other than (a) the Participants indicated on the Status 
Information and (b) the institutional customers that are counterparties 
to the transaction for which the Participants indicated on the Status 
Information are acting with respect to the transaction, (iii) the 
agreement of the Matching Utility that the Matching Utility will 
indemnify, hold harmless and agree, on demand, to reimburse DTC, its 
stockholders, officers, directors and employees from and against and 
for any and all claims, liabilities, obligations, damages, actions, 
penalties, losses, costs, expenses and disbursements, including, 
without limitation, attorneys' fees and disbursements (``Claims''), 
which they may sustain by reason of DTC's providing Status Information 
to the Matching Utility, except for any Claims

[[Page 63951]]

which result from the gross negligence or willful misconduct of the 
person asserting a right to indemnification, (iv) the agreement of the 
Matching Utility to pay the Status Information Fee, (v) the agreement 
of the Matching Utility to notify DTC immediately if the Matching 
Utility becomes aware of Status Information provided to it by DTC being 
distributed to a third party other than as authorized pursuant to (ii) 
above, and (vi) the acknowledgement of the Matching Utility that DTC 
may terminate the Status Information Agreement in the event that (a) 
DTC becomes aware that the Matching Utility has used or distributed the 
Status Information in a manner that violates the terms of the Status 
Information Agreement, (b) the Matching Utility does not pay the Status 
Information Fee in accordance with the terms of the Fee Schedule, or 
(c) DTC submits a rule filing to the SEC, which is approved by the SEC 
or otherwise becomes effective pursuant to the Act to discontinue DTC's 
distribution of Status Information to Matching Utilities.
Implementation Timeframe
    The proposed rule change would be effective upon approval of the 
proposed rule change by the Commission.
2. Statutory Basis
    Section 17A(b)(3)(F) of the Act \22\ requires, inter alia, that the 
Rules promote the prompt and accurate clearance and settlement of 
securities transactions. DTC believes that the proposed rule changes 
are consistent with this provision because by allowing DTC to provide 
Status Information to Matching Utilities in accordance with the 
proposal as described above, the proposed rule change would facilitate 
the distribution of information on Exceptions to the parties of 
Eligible Transactions. This distribution of Status Information would 
allow for enhanced communication among the parties to an Eligible 
Transaction to address an Exception so that the Eligible Transaction 
may meet DTC controls and be processed for end-of-day settlement. 
Therefore, by facilitating the distribution of Status Information to a 
Matching Utility, and thereby facilitating the ability of a Matching 
Utility to provide this information to the applicable parties to an 
Eligible Transaction that may address related Exceptions and resolve 
related issues so that a transaction may be processed for settlement, 
DTC believes that the proposed rule change would promote the prompt and 
accurate clearance and settlement of securities transactions consistent 
with Section 17A(b)(3)(F) of the Act.\23\
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    \22\ 15 U.S.C. 78q-1(b)(3)(F).
    \23\ Id.
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    Rule 17Ad-22(e)(20) \24\ promulgated under the Act requires DTC to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to, as applicable, identify, monitor, 
and manage risks related to any link the covered clearing agency 
establishes with one or more other clearing agencies, financial market 
utilities, or trading markets. DTC believes that the proposed rule 
change is consistent with this Rule because the proposed Status 
Information Agreement, which would include the terms as set forth 
above, that would be required to be provided by a Matching Utility 
prior to DTC distributing Status Information to it, would limit DTC's 
exposure to legal risks and expenses that may otherwise arise in 
connection with such distribution by including an indemnity from the 
Matching Utility with respect to its receipt of Status Information and 
manage privacy risk by requiring Matching Utilities to not distribute 
Status Information to unauthorized third parties, as described above.
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    \24\ 17 CFR 240.17Ad-22(e)(20).
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(B) Clearing Agency's Statement on Burden on Competition

    DTC believes the proposed rule change could impact competition.\25\ 
DTC does not believe that the proposed rule change to allow DTC to 
provide Status Information to a Matching Utility that is a party to a 
transaction (i.e., the party originating the confirm or processing the 
affirm) would impose a burden on competition for Matching Utilities and 
Participants, because by adding text to the Settlement Guide to allow 
DTC to provide Status Information to a Matching Utility, as applicable, 
the proposal is merely facilitating the transmission of Status 
Information that would enable the counterparties to an Eligible 
Transaction to address Exceptions in order to facilitate processing of 
the transaction by DTC. In addition, Status Information would be 
available to any Matching Utility that requests it and satisfies the 
applicable requirements that would be set forth in the Settlement 
Guide. DTC does not believe the proposed rule change that would add 
text referencing that DTC may charge a fee to a Matching Utility that 
receives Status Information would impose a burden on competition, 
because any such fee would not take effect until after such a fee is 
filed as part of a subsequent rule filing that would be submitted by 
DTC to the Commission. DTC believes that the provision of Status 
Information to a Matching Utility could promote competition, to the 
extent Status Information is further transmitted by the Matching 
Utility to the counterparties to an applicable Eligible Transaction, by 
facilitating Participants' ability to address an Exception that may 
affect the processing of the Eligible Transaction at DTC.
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    \25\ 15 U.S.C. 78q-1(b)(3)(I).
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    (C) Clearing Agency's Statement on Comments on the Proposed Rule 
Change Received From Members, Participants, or Others
    Written comments relating to this 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 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate 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 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 email to rule-comments@sec.gov. Please include 
File Number SR-DTC-2018-010 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-2018-010. 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

[[Page 63952]]

post all comments on the Commission's internet website (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 website 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 website (http://dtcc.com/legal/sec-rule-filings.aspx). All comments received will be posted without 
change. Persons submitting comments are cautioned that we do not redact 
or edit personal identifying information from comment submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-DTC-2018-010 
and should be submitted on or before January 2, 2019.
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    \26\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-26913 Filed 12-11-18; 8:45 am]
 BILLING CODE 8011-01-P