Document ID: SEC-2011-0151-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Depository Trust Co.
Posted Date: 2011-02-02T05:00Z

[Federal Register Volume 76, Number 22 (Wednesday, February 2, 2011)]
[Notices]
[Pages 5843-5845]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-2225]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63775; File No. SR-DTC-2011-01]

Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing and Order Granting Accelerated Approval of Proposed 
Rule Change To Amend the Dividends Service Guide

January 26, 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 January 13, 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 
and Order to solicit comments on the proposed rule change from 
interested persons and to approve the proposed rule change on an 
accelerated basis.
---------------------------------------------------------------------------

    \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/2011/dtc/2011-01.pdf.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    DTC proposes to amend its Dividends Service Guide (``Guide'') to: 
(1) clarify DTC's policy of payment allocations; (2) begin allocation 
of funds from agents received with corresponding CUSIP-level 
identification information at 8:20 a.m.; and (3) make other conforming 
changes.

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 III below. DTC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of these 
statements.\4\
---------------------------------------------------------------------------

    \4\ The Commission has modified the text of the summaries 
prepared by DTC.
---------------------------------------------------------------------------

(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    One of core asset services provided by the DTC is the daily 
collection and allocation of cash entitlements due on DTC-eligible 
securities. These entitlements, known as Principal and Income (``P&I'') 
payments, include dividend, interest, periodic principal, redemption, 
and maturity payments arising from the 3.5 million securities eligible 
at DTC.
    Many paying agents service more than one issue and typically wire 
to DTC a single ``bulk'' payment to be allocated to numerous issues or 
different types of payments for a single issue. Paying agents are 
required to provide with bulk payments an automated file that provides 
corresponding Committee on Uniform Security Identification Procedures 
(``CUSIP'') level identification information about the wire payment.\5\ 
CUSIP-level detail

[[Page 5844]]

includes the security's CUSIP, the payment amount for the CUSIP, the 
payable date, and the payment type (i.e., dividend, interest, 
principal, etc.). The automated CUSIP-level detail allows systemic 
receipt and allocation of the bulk payment.
---------------------------------------------------------------------------

    \5\ All paying agents are required to sign DTC's Operational 
Arrangements (``OA'') letter agreeing to comply with the provisions 
of the OA, which set forth the requirements necessary for an issue 
to become and remain eligible for DTC Services. The OA is available 
on DTCC's Web site for agents, issuers, and any other interested 
parties at http://www.dtcc.com/downloads/legal/rules_proc/eligibility/operational.arrangements.memo.pdf. See also DTC 
Important Notice B 1805-07 (June 29, 2007).
---------------------------------------------------------------------------

    Funds from paying agents received with CUSIP-level identification 
information are allocated upon receipt beginning at 9 a.m. ET and 
continuing until 3 p.m. ET. Payments received without CUSIP-level 
detail cannot be systematically received and allocated because lack of 
identifying information included with the payments. In these instances, 
DTC has to work with the paying agent to obtain CUSIP-level details so 
that it can manually allocate funds to the appropriate CUSIPs. 
Currently, funds without corresponding CUSIP-level detail that are 
received by 3 p.m. ET by DTC are allocated at 3:15 p.m. ET using an 
algorithmic formula that allocates each agent's unidentified funds.
    The majority of payments are sent to DTC over the Fedwire.\6\ The 
``cut-off'' time for these allocations is generally at about 3 p.m. ET 
to permit completion of the settlement process at about 4:30 p.m. ET 
each day. Since the Fedwire remains open until 6 p.m. ET, significant 
volumes of expected payments are received between DTC's allocation cut-
off at 3 p.m. ET and the Fedwire close at 6 p.m. ET. On peak payment 
days, the volume of funds received after the allocation cut-off can 
represent upwards of several billion dollars (on average, about 2-4% of 
funds due come in after the allocation cut-off time).
---------------------------------------------------------------------------

    \6\ Some payments are sent as Automated Clearing House (ACH) 
transfers.
---------------------------------------------------------------------------

    Aside from those allocations where DTC has reason to believe that 
the related payment from the agent or issuer will not be received on 
the payable date, historically, DTC has allocated nearly all 
entitlements on their scheduled payable date, including those paid to 
DTC after established intraday cut-off times or received without the 
CUSIP level detail. Where DTC had information that payment would not be 
made on the payable date, DTC are allocated the payments upon receipt 
and identification.
Proposed Change to the Existing Practice
    As a result of an extensive review of current policies and 
procedures and in consultation with its regulators, DTC has determined 
that the allocation of entitlements prior to funding or without CUSIP-
level detail subjects DTC to potential credit and liquidity risks. For 
example, one such risk is that of a ``double default'' where after an 
allocation is made, the agent/issuer expected to make the payment does 
not do so, and the participant that received the allocation defaults 
before DTC can recover it. While this ``allocate all'' practice 
provides increased allocations to DTC participants, it does so at the 
expense of the risks described above.
    In order to address these risks, DTC has been working extensively 
with paying agents to improve their payment timeliness and accuracy in 
a variety of ways. Paying agents are not provided with reports 
identifying various defects (for example, late, incomplete, or late and 
incomplete payment detail) that should allow them to perform root cause 
analysis and improve their processing and performance. Additionally, 
DTC has worked with several larger paying agents in their conversion to 
an automated means of providing CUSIP-level detail. As a result of 
these improvements, DTC has over the last few years greatly reduced the 
proportion of funds received late or without appropriate CUSIP level 
detail (compared to 2009, 2010 allocations relating to late or 
unidentified payments have decreased 60%--an estimated $50 billion in 
2010 compared to $128 billion in 2009).
    With risk mitigation at the forefront of market participants and 
regulators' concerns and given the extensive progress that DTC and 
paying agents have made in improving agents' payment practices, DTC 
proposes to discontinue the current ``allocate all'' practice and to 
move to a methodology that results in the allocation only of those 
entitlements paid before the cut-off and identified at a CUSIP-level. 
As a result of this proposed change in practice, DTC also proposes to 
discontinue its use of the algorithmic formula to allocate unidentified 
funds since this calculation will no longer be necessary.
    In order to accommodate the anticipated increase in funds not 
allocated on the payable date due to late or unidentified payments, DTC 
also proposes to begin allocation of funds received with corresponding 
CUSIP-level identification information upon receipt, beginning at 8:20 
a.m. ET and continuing every 20 minutes until shortly after the 3 p.m. 
ET cut-off time. This change in time will allow for more customers to 
receive timely and properly identified payments on the payable date.
    DTC believes that the implementation of this policy eliminates the 
credit risk associated with DTC allocating cash entitlements to 
participants before such payments are received from the paying agent or 
issuer.
Implementation Timeframe
    DTC proposes to implement the changes set forth in this filing on 
February 7, 2011. DTC participants, paying agents, and other financial 
intermediaries were first notified of this intended change through 
DTCC's publication of a White Paper to the Industry in November 
2009.\7\ In order to ensure widespread awareness and minimize the 
service impact to customers, DTC undertook in 2010 a number of 
initiatives aimed at paying agents in order to prepare them for the 
implementation of these changes. First, an Industry Task Force was 
established to ensure collaboration and a voice for key stakeholders 
and industry constituencies as the policy moved forward.\8\ DTC also 
sponsored educational tools to update paying agents and participants 
alike about the upcoming changes to the allocation policy.\9\ Finally, 
DTC gave numerous

[[Page 5845]]

platform presentations and updates to the following groups: Operations 
Advisory Committee, ISITC, ABA Corporate Trust Committee, SIFMA DTC 
Education Conference, SIFMA Operations & Regulatory Committee, SIFMA 
Asset Managers Forum, and DTC's Asset Services, Settlement and 
Securities Processing Advisory Boards.
---------------------------------------------------------------------------

    \7\ The White Paper can be found at http://www.dtcc.com/downloads/leadership/whitepapers/Payment_Refinement.pdf.
    \8\ The Industry Task Force consisted of the following entities: 
Association of Global Custodians, American Bankers Association, 
Asset Managers Forum, Bank of America LaSalle, Bank of America 
Merrill Lynch, Bank of NY Mellon, Bank Depository User Group, Brown 
Bros. Harriman, Citibank, Computershare, Deutsche Bank, Edward 
Jones, Government Finance Officers Association, Goldman Sachs, JP 
Morgan Chase, M&I Bank, Morgan Stanley, NFS (Fidelity 
Institutional), SIFMA, The Clearing House, U.S. Bank, and Wells 
Fargo. This Task Force held meetings in February, April, May, June, 
July, September, November, and December 2010.
    \9\ Pursuant to the release of the White Paper, DTC customers 
requested a tool that would help measure the impact of the proposed 
change at a participant level and identify current allocations 
occurring in a manner that was not consistent with the proposed 
methodology. In response to this request and effective January 22, 
2010, DTC developed and delivered two weekly reports--``CSH DIV--
Imprecise Allocations'' (e.g., dividends, interest, pro-rata 
principal) and ``CSH RED--Imprecise Allocations'' (i.e., calls, 
maturities, redemptions) that included all ``imprecise'' or 
noncompliant allocations for the given week. The reports were 
grouped by allocation day and sorted by CUSIP allowing participants 
to measure the impact of imprecise allocations as well as build a 
history of noncompliant CUSIPs to assist in driving allocation 
decisions. DTC then developed and put into place P&I Agent Payment 
Performance reports which provided agent-specific payment 
performance data and defects (e.g., late payments, missing detail) 
to agents. DTC identified target agents (i.e., those with late or 
unidentified payments) and tracked performance. Approximately 4,000 
agents were provided targeted feedback on specific process 
deficiencies (late or unidentified payments) in 2010. DTC also 
created and maintained a dedicated electronic mailbox for 
communicating en masse with paying agents. DTC contacted the vast 
majority of the approximately 7,000 different issuers and agents 
making entitlement payments to DTC to aid in the awareness of the 
P&I allocation refinement.
---------------------------------------------------------------------------

    The industry has been advised of the Industry Task Force's and 
DTC's progress in improving DTC's P&I payment process and the 
implementation date of the proposed rule changes through the issuance 
of Important Notices that were published on the DTCC Web site.\10\
---------------------------------------------------------------------------

    \10\ See DTCC Important Notice 6132-10 (January 15, 2010); DTC 
Important Notice 7045-10 (August 2, 2010); DTC Important 
Notice 7659-10 (November 22, 2010).
---------------------------------------------------------------------------

(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. 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-2011-01 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-2011-01. 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/2011-01.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-2011-01 and should be submitted on or before February 23, 2011.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    For the reasons stated below, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to DTC.\11\ 
Specifically, the Commission finds that the proposed rule change is 
consistent with Section 17A(b)(3)(F) of the Act which requires, among 
other things, that the rules of a clearing agency be designed to 
promote the prompt and accurate clearance and settlement of securities 
transactions, to assure the safeguarding of securities and funds of 
DTC's participants which are in the custody and control of the clearing 
agency, and to remove impediments to and perfect the mechanism of a 
national system for prompt and accurate clearance and settlement of 
securities transactions.\12\
---------------------------------------------------------------------------

    \11\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \12\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    As described in this filing, DTC's ``allocate all'' methodology 
subjects DTC, its participants, and beneficial owners to inherent 
problems. An in-depth study conducted internally by DTC at the request 
and recommendation of regulators has resulted in its decision to 
eliminate the ``allocate all'' policy. Accordingly, the Commission 
finds that the rule change is consistent with Section 17A(b)(3)(F) of 
the Act because it should allow DTC to reduce risks associated with its 
current P&I payment process, which in turn, should enable DTC to better 
safeguard the funds and securities which are in DTC's custody and 
control.
    DTC has requested that the Commission find good cause for approving 
the proposed rule change prior to the thirtieth day after publication 
of notice of filing thereof in the Federal Register. As discussed 
above, approval of the proposal will allow DTC to immediately cease its 
current ``allocate all'' P&I payment policy and implement a policy that 
reduces risk for DTC, its participants, paying agents, and other 
financial intermediaries associated with P&I allocations. Furthermore, 
in anticipation of implementation of these changes, DTC's participants 
and paying agents have already taken the necessary steps to code their 
systems for the February 7, 2011, implementation date. Change in this 
implementation date could cause significant system disruptions at these 
participants and paying agents. As such, the Commission finds good 
cause for approving the proposed rule change prior to the thirtieth day 
after the date of publication of notice filing in the Federal Register.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-DTC-2011-01) is approved on an 
accelerated basis.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
---------------------------------------------------------------------------

    \13\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-2225 Filed 2-1-11; 8:45 am]
BILLING CODE 8011-01-P