Document ID: SEC-2019-1372-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Depository Trust Co.
Posted Date: 2019-09-25T04:00Z

[Federal Register Volume 84, Number 186 (Wednesday, September 25, 2019)]
[Notices]
[Pages 50541-50543]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-20702]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87022; File No. SR-DTC-2019-005]

Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing of Partial Amendment No. 1 and Order Granting 
Accelerated Approval of a Proposed Rule Change, as Modified by Partial 
Amendment No. 1, To Amend the Settlement Guide To Implement a New 
Algorithm for Transactions Processed in the Night Cycle

September 19, 2019.

I. Introduction

    On July 22, 2019, the Depository Trust Company (``DTC'') filed with 
the Securities and Exchange Commission (``Commission'') proposed rule 
change SR-DTC-2019-005, pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') and Rule 19b-4 thereunder.\1\ The 
proposed rule change was published for comment in the Federal Register 
on August 8, 2019.\2\ On September 16, 2019, DTC filed Partial 
Amendment No. 1 to the proposed rule change to postpone the 
implementation date of the proposed rule change.\3\ The Commission did 
not receive any comment letters on the proposed rule change. The 
Commission is publishing this notice to solicit comment on Partial 
Amendment No. 1 from interested persons and to approve the proposed 
rule change, as modified by Partial Amendment No. 1 (hereinafter, 
``Proposed Rule Change''), on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4.
    \2\ Securities Exchange Act Release No. 86554 (August 2, 2019), 
84 FR 39025 (August 8, 2019) (SR-DTC-2019-005) (``Notice'').
    \3\ DTC submitted a courtesy copy of Partial Amendment No. 1 to 
the proposed rule change through the Commission's electronic public 
comment letter mechanism. Accordingly, Partial Amendment No. 1 to 
the proposed rule change has been publicly available on the 
Commission's website since September 16, 2019: https://www.sec.gov/comments/sr-dtc-2019-005/srdtc2019005-6132114-192254.pdf
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II. Description of the Proposed Rule Change \4\
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    \4\ Capitalized terms not defined herein are defined in the 
Rules, By-Laws and Organization Certificate of DTC (``Rules''), 
available at www.dtcc.com/~/media/Files/Downloads/legal/rules/
dtc_rules.pdf, and the DTC Settlement Service Guide (``Settlement 
Guide''), available at http://www.dtcc.com/~/media/Files/Downloads/
legal/service-guides/Settlement.pdf.
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    DTC proposes to amend the Settlement Guide to implement a new 
processing algorithm for book-entry Deliveries \5\ and Payment Orders 
\6\ processed in the DTC night cycle (``Night Cycle'').\7\ 
Specifically, DTC proposes to make enhancements to its processing of 
transactions in the Night Cycle.
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    \5\ Pursuant to Rule 1, the term ``Delivery'' as used with 
respect to a Security held in the form of a Security Entitlement on 
the books of DTC, means debiting the Security from an Account of the 
Deliverer and crediting the Security to an Account of the Receiver. 
See Rules, supra note 4.
    \6\ Pursuant to the Settlement Guide, ``Payment Order'' means a 
transaction in which a Participant charges another Participant for 
changes in value for outstanding stock loans or option contract 
premiums. See Settlement Guide, supra note 4, at 5.
    \7\ The Night Cycle starts at approximately 8:30 p.m. ET on the 
Business Day prior to settlement date and runs until approximately 
10:00 p.m. ET each Business Day. Transactions that cannot satisfy 
DTC's controls at the time they are introduced to DTC will recycle 
throughout the day and be continuously reattempted until 
approximately 3:10 p.m. for valued transactions, and 6:35 p.m. for 
free transactions. See Notice, supra note 2, at 39026.
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    Currently, other than a limited look-ahead process as described 
below, DTC does not employ a processing mechanism that is designed to 
proactively optimize the percentage of available transactions that are 
processed for settlement on settlement date. DTC proposes to implement 
a process that would facilitate a higher percentage of available 
transactions being processed for settlement during the Night Cycle.\8\
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    \8\ DTC stated that 50 percent of transactions available for 
processing at the start of the Night Cycle are processed for 
settlement during the Night Cycle. DTC anticipates that the proposal 
would increase the percentage of transactions processed for 
settlement during the Night Cycle to approximately 65 percent. See 
Notice, supra note 2, at 39026.
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    Specifically, pursuant to the Proposed Rule Change, DTC would 
introduce an algorithm that would test multiple scenarios that would 
incorporate all transactions available for processing at the start of 
the Night Cycle as a single batch (``Night Batch Process''), to 
determine the order of processing of those transactions that allows for 
the optimal percentage of the transactions to satisfy risk and position 
controls (i.e., the Collateral Monitor and Net Debit Cap controls),\9\ 
and therefore be processed for settlement in the Night Cycle. 
Consistent with DTC's existing processing environment, the scenarios 
used would only involve processing of the transactions on a bilateral 
basis (i.e., no netting of Deliveries).\10\ Once the optimal order of 
processing has been identified, the results reflecting this optimal 
processing order would be incorporated into DTC's core processing 
environment on a transaction-by-transaction basis, and member output 
would be produced using existing DTC output facilities. Delivery 
instructions provided to DTC after the Night Batch Process has begun 
would be submitted for daytime processing. According to DTC, the 
Proposed Rule Change would facilitate more efficient processing of 
Deliveries and Payment Orders in the Night Cycle and increase the 
percentage of transactions that have been processed for settlement 
prior to the start of regular daytime processing.\11\
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    \9\ In managing its credit risk, DTC uses the Collateral Monitor 
and Net Debit Cap. These two controls work together to protect the 
DTC settlement system in the event of Participant default. The 
Collateral Monitor requires net debit settlement obligations, as 
they accrue intraday, to be fully collateralized; the Net Debit Cap 
limits the amount of any Participant's net debit settlement 
obligation to an amount that can be satisfied with DTC liquidity 
resources (the Participants Fund and the committed line of credit 
from a consortium of lenders). See Settlement Guide, supra note 4, 
at 64-67.
    \10\ The Proposed Rule Change relates only to the processing 
order of Deliveries and does not impact DTC's funds settlement 
process, by which associated funds debits and credits in the 
Participant's settlement account are netted intraday to calculate, 
at any time, a net debit balance or net credit balance, resulting in 
an end-of-day settlement obligation or right to receive payment.
    \11\ See Notice, supra note 2, at 39026.

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[[Page 50542]]

Elimination of Obsolete Functions

    Currently, Participants can use a profile in the Inventory 
Management System (``IMS'') that allows them to define the order in 
which their transactions get submitted for processing during the Night 
Cycle.\12\ The submission ordering allows Participants to control the 
order in which different transaction types are submitted into DTC's 
core processing system. The recycle ordering allows Participants to 
control how DTC attempts to process recycling, or pending, 
transactions. Similar to the submission ordering, Participants can also 
prioritize transactions by transaction types under recycle ordering. 
Additionally, Participants can instruct DTC to (i) attempt transactions 
in the defined order but complete any transaction that can be 
completed, (ii) only complete transactions in the defined order, or 
(iii) not complete any transactions until instructed to do so. Because 
the proposed Night Batch Process would attempt to maximize settlement 
regardless of transaction type, the IMS profile would become obsolete 
with respect to transactions processed in the Night Cycle and would not 
be utilized for processing of transactions in the Night Batch Process.
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    \12\ See Securities Exchange Act Release No. 52450 (September 
15, 2005), 70 FR 55641 (September 22, 2005) (File No. SR-DTC-2005-
07) and Securities Exchange Act Release No. 50944 (December 29, 
2004), 70 FR 1927 (January 11, 2005) (File No. SR-DTC-2004-10).
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    DTC's look-ahead process (``Look-Ahead Process'') runs throughout 
the processing day at fifteen-minute intervals and selects pairs of 
transactions that when processed simultaneously will not violate the 
involved Participants' Net Debit Cap, Collateral Monitor, and other 
risk management system controls.\13\
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    \13\ See Settlement Guide, supra note 4, at 43.
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    The Look-Ahead Process reduces transaction blockage for Securities 
by identifying a receive transaction pending due to a Net Debit Cap 
insufficiency, and determines whether the processing of an offsetting 
delivery transaction pending because of a quantity deficiency in the 
same Security would permit both transactions to be completed in 
compliance with DTC's risk management system controls.\14\ DTC's 
processing system calculates the net effect to the Collateral Monitor 
and Net Debit Cap controls for all three Participants involved, and if 
the net effect will not result in a deficit in the Collateral Monitor 
or Net Debit Cap for any of the three Participants, the system 
processes the transactions simultaneously.\15\ Because the Night Batch 
Process would provide an algorithm to maximize settlement for all 
transactions processed in the Night Cycle, the Look-Ahead Process would 
become obsolete for Night Cycle processing and would not be utilized 
for processing of transactions in the Night Batch Process.
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    \14\ Id.
    \15\ Id.
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Description of Partial Amendment No. 1

    In Partial Amendment No. 1, DTC proposes to amend the 
implementation timeframe of the proposal.\16\ In its original filing 
with the Commission, DTC previously stated that the proposed rule 
change would be effective by September 26, 2019. Pursuant to Partial 
Amendment No. 1, the Proposed Rule Change would be effective by 
December 6, 2019.
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    \16\ Partial Amendment No. 1, supra note 3.
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III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \17\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Act and rules and regulations thereunder applicable 
to such organization. After carefully considering the Proposed Rule 
Change, 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. In particular, the Commission 
finds that the Proposed Rule Change is consistent with Section 
17A(b)(3)(F) of the Act.\18\
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    \17\ 15 U.S.C. 78s(b)(2)(C).
    \18\ 15 U.S.C. 78q-1(b)(3)(F)
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    Section 17A(b)(3)(F) of the Act requires, in part, that the rules 
of a clearing agency be designed ``to assure the safeguarding of 
securities and funds which are in the custody or control of the 
clearing agency or for which it is responsible.'' \19\ The Proposed 
Rule Change would implement a new processing algorithm for book-entry 
Deliveries and Payment Orders processed in the Night Cycle. 
Specifically, DTC would test the entire batch of transactions available 
for processing at the start of the Night Batch Process to determine the 
optimal order to process transactions in the Night Cycle, such that 
they may satisfy risk and position controls, which would help maximize 
the number of transactions processed for settlement during the Night 
Cycle.
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    \19\ Id.
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    Helping to identify the optimal order to process transactions for 
settlement would help maximize the number of transactions processed for 
settlement during the Night Cycle. Therefore, the Commission 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.

IV. Solicitation of Comments on Partial Amendment No. 1 to the Proposed 
Rule Change

    Interested persons are invited to submit written data, views and 
arguments concerning whether Partial Amendment No. 1 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-2019-005 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-DTC-2019-005. 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 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

[[Page 50543]]

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-2019-005 and should be 
submitted on or before October 16, 2019.

V. Accelerated Approval of the Proposed Rule Change, as Modified as 
Partial Amendment No. 1

    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Act,\20\ to approve the proposed rule change prior to the 30th day 
after the date of publication of Partial Amendment No. 1 in the Federal 
Register. As noted above, Partial Amendment No. 1 delays the 
implementation timeframe of the proposal from September 26, 2019 to 
December 6, 2019.\21\ The Commission believes that the Partial 
Amendment is consistent with the Act because it does not raise any 
regulatory issues and would provide more time before the proposal would 
go into effect.
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    \20\ 15 U.S.C. 78s(b)(2).
    \21\ Partial Amendment No. 1, supra note 3.
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    For the reasons discussed above, the Commission finds that Partial 
Amendment No. 1 is reasonably designed to protect investors and the 
public interest, and consistent with the requirements of the Act. 
Accordingly, the Commission finds good cause, pursuant to Section 
19(b)(2) of the Act,\22\ to approve the proposed rule change, as 
modified by Partial Amendment No. 1, on an accelerated basis.
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    \22\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change, as modified by Partial Amendment No. 1, is 
consistent with the requirements of the Act and, in particular, with 
the requirements of Section 17A of the Act \23\ and the rules and 
regulations promulgated thereunder.
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    \23\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\24\ that proposed rule change SR-DTC-2019-005, as modified by 
Amendment No. 1, be, and hereby is, approved on an accelerated 
basis.\25\
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    \24\ 15 U.S.C. 78s(b)(2).
    \25\ In approving the proposed rule change, the Commission 
considered the proposals' impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
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    \26\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-20702 Filed 9-24-19; 8:45 am]
 BILLING CODE 8011-01-P