Document ID: SEC-2018-0031-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Depository Trust Co.
Posted Date: 2018-01-08T05:00Z

[Federal Register Volume 83, Number 5 (Monday, January 8, 2018)]
[Notices]
[Pages 927-929]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-00081]

[[Page 927]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82433; File No. SR-DTC-2017-023]

Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing of a Proposed Rule Change To Restore the Timeframe for 
Processing Credit Post-Payable Adjustments

January 2, 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 December 21, 2017, 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 by DTC would amend the Distributions 
Service Guide (``Guide'') \3\ to (i) restore a practice of DTC relating 
to the timeframe for accepting a request from an issuer or its agent 
(``Paying Agent'') for a post-payable adjustment (``PPA'') of principal 
and income payments (``P&I'') that results in the allocation of 
additional credits to Accounts of affected Participants (``Credit 
PPA''), and (ii) make technical changes to the Guide, as more fully 
described below.\4\
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    \3\ Available at http://www.dtcc.com/~/media/Files/Downloads/
legal/service-guides/Distributions-Service-Guide-FINAL-January-
2017.pdf.
    \4\ 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, available 
at http://www.dtcc.com/~/media/Files/Downloads/legal/rules/
dtc_rules.pdf; and in the Guide, supra note 3.
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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 by DTC would amend the Guide to (i) 
restore a practice of DTC relating to the timeframe for accepting a 
request from a Paying Agent for a Credit PPA, and (ii) make technical 
changes to the Guide, as more fully described below.
(i) Background
    One of the core asset services provided by DTC is the daily 
collection and allocation of funds distributions on Securities held by 
DTC. Commonly referred to as P&I, these funds include dividend, 
interest, periodic principal, redemption, and maturity payments arising 
from the servicing of Securities held by DTC. DTC provides centralized 
processing to facilitate this service, and, on each Business Day, 
communicates with Paying Agents regarding the P&I due that day, 
collects payments, and allocates entitlements to Participants.
    Occasionally, a Paying Agent may request a PPA at DTC due to an 
error on the part of the Paying Agent, trustee, issuer, or a change in 
the principle factor or rate. A PPA can result in debits (``Debit 
PPA'') and/or credits to Settlement Accounts of the affected 
Participants.
    When DTC receives a request for a PPA from a Paying Agent,\5\ DTC 
processes the debit and/or credit adjustments for the misapplied 
principal or income to the Settlement Accounts of affected 
Participants. Accordingly, affected Participants will need to process 
adjustments to their customers' accounts for any misapplied principal 
or income and any associated interest. In addition, affected 
Participants may need to process adjustments against any customer that 
traded the security after the initial payment had occurred.
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    \5\ A request for a Credit PPA will only be processed by DTC on 
receipt of associated funds.
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    Debit PPAs carry particular risks. When DTC processes a Debit PPA, 
it will automatically debit the Settlement Accounts of the affected 
Participants, which in turn must seek to collect the funds from their 
customers, which in turn may need to recover from end investors. This 
recovery process gets more difficult as time passes and creates 
significant credit exposure, as customers and the end investors may no 
longer have the funds to debit, or may have closed or moved their 
accounts.
    Historically, DTC accommodated Paying Agent adjustment requests by 
processing PPAs (whether a Debit PPA, a Credit PPA, or both) up to one 
year after the initial payment was made (``One Year Cutoff''). In 2012, 
the Commission approved a DTC rule filing that implemented a practice 
whereby DTC would not accept a request for a PPA from a Paying Agent 
beyond ninety calendar days after the initial payment date (``Ninety-
Day Cutoff'').\6\ The purpose of shortening the timeframe was to 
mitigate the risks associated with PPAs, in particular Debit PPAs, by 
reducing the volume of PPAs and to allocate the accountability to the 
Paying Agents responsible for the PPAs.
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    \6\ Securities Exchange Act Release No. 67599 (August 6, 2012), 
77 FR 47898 (August 10, 2012) (SR-DTC-2012-03). The implementation 
was staggered over the course of 2014. The Ninety-Day Cutoff was 
effective as of January 1, 2015.
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    Under the current practice, if a Paying Agent wants to effectuate a 
PPA beyond the Ninety-Day Cutoff, it cannot be processed through DTC. 
The Paying Agent must request from DTC an allocation register listing 
all affected Participants and positions. Using the allocation register, 
the Paying Agent must then attempt to contact each affected Participant 
to make direct adjustments and/or payment arrangements outside of DTC.
(ii) Proposal To Restore the One Year Cutoff for Credit PPAs
    After the Ninety-Day Cutoff became effective on January 1, 2015, a 
post-payable adjustment task force (``Task Force''), formed by DTC and 
comprised of Paying Agents and representative members of the 
Association of Global Custodians (``AGC''), the American Bankers 
Association, and the Corporate Actions division of the Securities 
Industry and Financial Market Association (``SIFMA''), monitored the 
PPA landscape. From that review, the Task Force determined that all 
parties--Paying Agents, issuers, Participants, investors--would benefit 
from restoring the timeframe for the processing of Credit PPAs (but not 
Debit PPAs) from the Ninety-Day Cutoff back to the original One Year 
Cutoff. The restoration of the PPA timeframe back to a One Year Cutoff 
for Credit PPAs would allow Paying Agents more time to make correct 
allocations to Participants efficiently through DTC, rather than 
requiring the Paying Agent to make the adjustments bilaterally with 
each Participant, outside of DTC. This efficiency would allow 
Participants, their customers, and end investors to receive their funds 
more quickly.
    DTC and the Task Force determined to preserve the Ninety-Day Cutoff 
for

[[Page 928]]

Debit PPAs.\7\ As described above, Debit PPAs create significant credit 
risk exposure for Participants, customers, and investors as more time 
passes, because it becomes more difficult for Participants to recover 
debited funds from their customers that may no longer have an account, 
may not have available funds, or may no longer service the end 
investor. By retaining the Ninety-Day Cutoff for Debit PPAs, DTC would 
be (i) maintaining the appropriate allocation of risk among 
Participants, their clients, investors, issuers and Paying Agents, (ii) 
creating proactive incentives for Paying Agents and issuers to reduce 
the number of Debit PPAs, and (iii) promoting payment finality.
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    \7\ Under the proposed rule change, if DTC receives a PPA that 
would result in both credits to and debits from affected Participant 
accounts after the Ninety-Day Cutoff but before the One Year Cutoff 
for Credit PPAs, DTC would only process the credits (assuming 
associated funds were also received), and the Paying Agent would 
have to collect the debits outside of DTC.
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    For the reasons set forth above, DTC proposes to restore the 
timeframe for the processing of Credit PPAs from the Ninety-Day Cutoff 
back to a One Year Cutoff.\8\ In addition, DTC proposes to modify the 
language of the Guide to (i) reflect a One Year Cutoff for Credit PPAs 
and a Ninety-Day Cutoff for Debit PPAs, and (ii) remove outdated 
language about the date of effectiveness of the Ninety-Day Cutoff.
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    \8\ No other DTC practices with regard to PPAs would change, 
including without limitation, DTC's practice of servicing all court-
directed adjustments (with appropriate supporting documentation), 
regardless of age.
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(iii) Technical Changes to the Guide
    DTC is also proposing to modify language in the Guide to (i) remove 
the statement that PPA adjustments will appear on Participant 
Statements, as adjustments can only be viewed using CA Web, ISO 20022 
messages and CCF Files, (ii) for consistency with the term ``P&I'', add 
the word ``principal'' to the list of payments that may be subject to a 
PPA, and (iii) remove an incorrect reference to CMO/ABS securities.\9\
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    \9\ There can be a change in the principal factor or rate on any 
security, not just a CMO/ABS security.
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Outreach
    DTC discussed the Task Force's recommendation to restore the 
timeframe for the processing of Credit PPAs to a One Year Cutoff with 
the SIFMA Corporate Action Section and AGC, which have agreed with the 
recommendation.
Implementation Date
    DTC will implement the proposed rule change upon approval of this 
filing by the Commission.
2. Statutory Basis
    DTC believes that the proposed rule change is consistent with the 
requirements of Section 17A(b)(3)(F) of the Act.\10\
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    \10\ 15 U.S.C. 78q-1(b)(3)(F).
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    Section 17A(b)(3)(F) of the Act requires that the rules of the 
clearing agency be designed, inter alia, to promote the prompt and 
accurate clearance and settlement of securities transactions.\11\ By 
restoring the timeframe back to a One Year Cutoff for the processing of 
Credit PPAs through DTC, DTC is providing centralized processing for 
Credit PPAs for a longer period of time, whereas Paying Agents would 
otherwise have to process the Credit PPAs outside of DTC after ninety 
days. In addition, the proposed rule change would make technical 
changes to the Guide, as described above, which would help ensure that 
the procedures relating to PPAs are accurate and consistent. Therefore, 
DTC believes that the proposed rule change would facilitate a more 
efficient process for Paying Agents to allocate funds, and for 
Participants to receive funds owed to them, as well as allow 
Participants to have a clearer understanding of the related procedures, 
thereby removing impediments to and perfecting the mechanism of a 
national system for the prompt and accurate clearance and settlement of 
securities transactions, consistent with the requirements of the Act, 
in particular Section 17A(b)(3)(F), cited above.
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    \11\ Id.
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(B) Clearing Agency's Statement on Burden on Competition

    DTC does not believe that the proposed rule change with respect to 
the Ninety-Day Cutoff for Credit PPAs would have any impact on 
competition because it would apply to all Paying Agents and would allow 
all Participants to receive their correct P&I credit allocations in a 
more efficient manner, and therefore would not disproportionately 
impact any Paying Agent or Participant.
    DTC does not believe that the proposed rule change with respect to 
technical changes to the Guide would have any impact on competition 
because it would merely update the Guide to make changes for accuracy 
and consistency and therefore would not affect the rights and 
obligations of any Participant or other interested party.

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants, or Others

    Written comments relating to the proposed rule change have not been 
solicited or received. DTC will notify the Commission of any written 
comments received by DTC.

III. Date of Effectiveness of the Proposed Rule Change, and Timing for 
Commission Action

    Within 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 [email protected]. Please include 
File Number SR-DTC-2017-023 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-2017-023. 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

[[Page 929]]

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-2017-023 and should be submitted on 
or before January 29, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-00081 Filed 1-5-18; 8:45 am]
 BILLING CODE 8011-01-P