Document ID: SEC-2018-1369-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Depository Trust Co.
Posted Date: 2018-08-30T04:00Z

[Federal Register Volume 83, Number 169 (Thursday, August 30, 2018)]
[Notices]
[Pages 44381-44393]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-18867]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83953; File No. SR-DTC-2017-803]

Self-Regulatory Organizations; The Depository Trust Company; 
Notice of No Objection to an Advance Notice, as Modified by Amendment 
No. 1, To Adopt a Recovery & Wind-Down Plan and Related Rules

August 27, 2018.
    On December 18, 2017, The Depository Trust Company (``DTC'') filed 
with the Securities and Exchange Commission (``Commission'') advance 
notice SR-DTC-2017-803 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\ to adopt a recovery and 
wind-down plan (``R&W Plan'') and related rules.\3\ The advance notice 
was published for comment in the Federal Register on January 30, 
2018.\4\ In that publication, the Commission also extended the review 
period of the advance notice for an additional 60 days, pursuant to 
Section 806(e)(1)(H) of the Clearing Supervision Act.\5\ On April 10, 
2018, the Commission required additional information from DTC pursuant 
to Section 806(e)(1)(D) of the Clearing Supervision Act,\6\ which 
tolled the Commission's period of review of the advance notice until 60 
days from the date the information required by the Commission was 
received by the Commission.\7\ On June 28, 2018, DTC filed Amendment 
No. 1 to the advance notice to amend and replace in its entirety the 
advance notice as originally filed on December 18, 2017.\8\ On July 6, 
2018, the Commission received a response to its request for additional 
information in consideration of the advance notice, which, in turn, 
added a further 60-days to the review period pursuant to Section 
806(e)(1)(E) and (G) of the Clearing Supervision Act.\9\ The Commission 
did not receive any comments. This publication serves as notice that 
the Commission does not object to the proposed changes set forth in the 
advance notice, as modified by Amendment No. 1 (hereinafter, ``Advance 
Notice'').
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    \1\ 12 U.S.C. 5465(e)(1).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ On December 18, 2017, DTC filed the advance notice as 
proposed rule change SR-DTC-2017-021 with the Commission pursuant to 
Section 19(b)(1) of the Act and Rule 19b-4 thereunder (``Proposed 
Rule Change''). 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4, 
respectively. The Proposed Rule Change was published in the Federal 
Register on January 8, 2018. Securities Exchange Act Release No. 
82432 (January 2, 2018), 83 FR 884 (January 8, 2018) (SR-DTC-2017-
021). On February 8, 2018, the Commission designated a longer period 
within which to approve, disapprove, or institute proceedings to 
determine whether to approve or disapprove the Proposed Rule Change. 
Securities Exchange Act Release No. 82669 (February 8, 2018), 83 FR 
6653 (February 14, 2018) (SR-DTC-2017-021, SR-FICC-2017-021, SR-
NSCC-2017-017). On March 20, 2018, the Commission instituted 
proceedings to determine whether to approve or disapprove the 
Proposed Rule Change. Securities Exchange Act Release No. 82912 
(March 20, 2018), 83 FR 12999 (March 26, 2018) (SR-DTC-2017-021). On 
June 25, 2018, the Commission designated a longer period for 
Commission action on the proceedings to determine whether to approve 
or disapprove the Proposed Rule Change. Securities Exchange Act 
Release No. 83509 (June 25, 2018), 83 FR 30785 (June 29, 2018) (SR-
DTC-2017-021, SR-FICC-2017-021, SR-NSCC-2017-017). On June 28, 2018, 
DTC filed Amendment No. 1 to the Proposed Rule Change. Securities 
Exchange Act Release No. 83628 (July 13, 2018), 83 FR 34263 (July 
19, 2018) (SR-DTC-2017-021). DTC submitted a courtesy copy of 
Amendment No. 1 to the Proposed Rule Change through the Commission's 
electronic public comment letter mechanism. Accordingly, Amendment 
No. 1 to the Proposed Rule Change has been publicly available on the 
Commission's website at https://www.sec.gov/rules/sro/dtc.htm since 
June 29, 2018. The Commission did not receive any comments. The 
proposal, as set forth in both the advance notice and the Proposed 
Rule Change, each as modified by Amendments No. 1, shall not take 
effect until all required regulatory actions are completed.
    \4\ Securities Exchange Act Release No. 82579 (January 24, 
2018), 83 FR 4310 (January 30, 2018) (SR-DTC-2017-803) (``Notice'').
    \5\ Pursuant to Section 806(e)(1)(H) of the Clearing Supervision 
Act, 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. 12 U.S.C. 5465(e)(1)(H). The Commission found that 
the advance notice raised novel and complex issues and, accordingly, 
extended the review period of the advance notice for an additional 
60 days until April 17, 2018. See Notice, supra note 4.
    \6\ 12 U.S.C. 5465(e)(1)(D).
    \7\ See 12 U.S.C. 5465(e)(1)(E)(ii) and (G)(ii); see Memorandum 
from the Office of Clearance and Settlement Supervision, Division of 
Trading and Markets, titled ``Commission's Request for Additional 
Information,'' available at http://www.sec.gov/rules/sro/dtc-an.shtml.
    \8\ Securities Exchange Act Release No. 83743 (July 31, 2018), 
83 FR 38344 (August 6, 2018) (SR-DTC-2017-803). DTC submitted a 
courtesy copy of Amendment No. 1 to the advance notice through the 
Commission's electronic public comment letter mechanism. 
Accordingly, Amendment No. 1 to the advance notice has been publicly 
available on the Commission's website at http://www.sec.gov/rules/sro/dtc-an.shtml since June 29, 2018.
    \9\ 12 U.S.C. 5465(e)(1)(E) and (G); see Memorandum from the 
Office of Clearance and Settlement Supervision, Division of Trading 
and Markets, titled ``Response to the Commission's Request for 
Additional Information,'' available at http://www.sec.gov/rules/sro/dtc-an.shtml.
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I. Description of the Advance Notice

    In the Advance Notice, DTC proposes to (1) adopt an R&W Plan; and 
(2) amend the Rules, By-Laws and Organization Certificate of DTC 
(``Rules'') \10\ to adopt Rule 32(A) (Wind-down of the Corporation) and 
Rule 38 (Market Disruption and Force Majeure) (each proposed Rule 32(A) 
and proposed Rule 38, a ``Proposed Rule'' and, collectively, the 
``Proposed Rules'').
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    \10\ Capitalized terms used herein and not otherwise defined 
herein are defined in the Rules.
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    DTC states that the R&W Plan would be used by the Board of 
Directors of DTC (``Board'') and DTC's management in the event DTC 
encounters scenarios that could potentially prevent it from being able 
to provide its critical services as a going concern.
    DTC states that the Proposed Rules are designed to (1) facilitate 
the implementation of the R&W Plan when necessary and, in particular, 
allow DTC to effectuate its strategy for winding down and transferring 
its business; (2) provide Participants with transparency around 
critical provisions of the R&W Plan that relate to their rights, 
responsibilities and obligations; and (3) provide DTC with the legal 
basis to implement those provisions of the R&W Plan when necessary.

A. DTC R&W Plan

    The R&W Plan would be structured to provide a roadmap, define the 
strategy, and identify the tools available to DTC to either (i) 
recover, in the event it

[[Page 44382]]

experiences losses that exceed its prefunded resources (such strategies 
and tools referred to herein as the ``Recovery Plan'') or (ii) wind-
down its business in a manner designed to permit the continuation of 
its critical services in the event that such recovery efforts are not 
successful (such strategies and tools referred to herein as the ``Wind-
down Plan'').
    The R&W Plan would identify (i) the recovery tools available to DTC 
to address the risks of (a) uncovered losses or liquidity shortfalls 
resulting from the default of one or more of its Participants, and (b) 
losses arising from non-default events, such as damage to its physical 
assets, a cyber-attack, or custody and investment losses, and (ii) the 
strategy for implementation of such tools. The R&W Plan would also 
establish the strategy and framework for the orderly wind-down of DTC 
and the transfer of its business in the remote event the implementation 
of the available recovery tools does not successfully return DTC to 
financial viability.
    As discussed in greater detail below, the R&W Plan would provide, 
among other matters, (i) an overview of the business of DTC and its 
parent, The Depository Trust & Clearing Corporation (``DTCC''); \11\ 
(ii) an analysis of DTC's intercompany arrangements and critical links 
to other financial market infrastructure (``FMI''); (iii) a description 
of DTC's services, and the criteria used to determine which services 
are considered critical; (iv) a description of the DTC and DTCC 
governance structure; (v) a description of the governance around the 
overall recovery and wind-down program; (vi) a discussion of tools 
available to DTC to mitigate credit/market \12\ risks and liquidity 
risks, including recovery indicators and triggers, and the governance 
around management of a stress event along a Crisis Continuum timeline; 
(vii) a discussion of potential non-default losses and the resources 
available to DTC to address such losses, including recovery triggers 
and tools to mitigate such losses; (viii) an analysis of the recovery 
tools' characteristics, including how they are designed to be 
comprehensive, effective, and transparent, how the tools provide 
incentives to Participants to, among other things, control and monitor 
the risks they may present to DTC, and how DTC seeks to minimize the 
negative consequences of executing its recovery tools; and (ix) the 
framework and approach for the orderly wind-down and transfer of DTC's 
business, including an estimate of the time and costs to effect a 
recovery or orderly wind-down of DTC.
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    \11\ DTCC is a user-owned and user-governed holding company and 
is the parent company of DTC and its affiliates, National Securities 
Clearing Corporation (``NSCC'') and Fixed Income Clearing 
Corporation (``FICC,'' and, together with NSCC and DTC, the 
``Clearing Agencies''). The R&W Plan would describe how corporate 
support services are provided to DTC from DTCC and DTCC's other 
subsidiaries through intercompany agreements under a shared services 
model.
    \12\ DTC states that it uses the term ``credit/market'' risks in 
the R&W Plan because, for DTC, credit risk and market risk are 
closely related. See infra note 23.
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    Certain recovery tools that would be identified in the R&W Plan are 
based in the Rules (including the Proposed Rules); therefore, 
descriptions of those tools in the R&W Plan would include descriptions 
of, and reference to, the applicable Rules and any related internal 
policies and procedures. Other recovery tools that would be identified 
in the R&W Plan are based in contractual arrangements to which DTC is a 
party, including, for example, existing committed or pre-arranged 
liquidity arrangements. Further, the R&W Plan would state that DTC may 
develop further supporting internal guidelines and materials that may 
provide operational support for matters described in the R&W Plan, and 
that such documents would be supplemental and subordinate to the R&W 
Plan.
    DTC states that many of the tools available to DTC that would be 
described in the R&W Plan are DTC's existing, business-as-usual risk 
management and default management tools, which would continue to be 
applied in scenarios of increasing stress. In addition to these 
existing, business-as-usual tools, the R&W Plan would describe DTC's 
other principal recovery tools, which include, for example, (i) 
identifying, monitoring and managing general business risk and holding 
sufficient liquid net assets funded by equity (``LNA'') to cover 
potential general business losses pursuant to the Clearing Agency 
Policy on Capital Requirements (``Capital Policy''),\13\ (ii) 
maintaining the Clearing Agency Capital Replenishment Plan 
(``Replenishment Plan'') as a viable plan for the replenishment of 
capital should DTC's equity fall close to or below the amount being 
held pursuant to the Capital Policy,\14\ and (iii) the process for the 
allocation of losses among Participants as provided in Rule 4 
(Participants Fund and Participants Investment).\15\ The R&W Plan would 
provide governance around the selection and implementation of the 
recovery tool or tools most relevant to mitigate a stress scenario and 
any applicable loss or liquidity shortfall.
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    \13\ See Securities Exchange Act Release No. 81105 (July 7, 
2017), 82 FR 32399 (July 13, 2017) (SR-DTC-2017-003, SR-FICC-2017-
007, SR-NSCC-2017-004).
    \14\ See id.
    \15\ See supra note 10.
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    The development of the R&W Plan is facilitated by the Office of 
Recovery & Resolution Planning (``R&R Team'') of DTCC.\16\ The R&R Team 
reports to the DTCC Management Committee (``Management Committee'') and 
is responsible for maintaining the R&W Plan and for the development and 
ongoing maintenance of the overall recovery and wind-down planning 
process. The Board, or such committees as may be delegated authority by 
the Board from time to time pursuant to its charter, would review and 
approve the R&W Plan biennially, and would also review and approve any 
changes that are proposed to the R&W Plan outside of the biennial 
review.
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    \16\ DTCC operates on a shared services model with respect to 
DTC and its other subsidiaries. Most corporate functions are 
established and managed on an enterprise-wide basis pursuant to 
intercompany agreements under which it is generally DTCC that 
provides a relevant service to a subsidiary, including DTC.
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    As discussed in greater detail below, the Proposed Rules would 
define the procedures that may be employed in the event of a DTC wind-
down, and would provide for DTC's authority to take certain actions on 
the occurrence of a Market Disruption Event, as defined therein. DTC 
states that the Proposed Rules are designed to provide Participants 
with transparency and certainty with respect to these matters. DTC also 
states that the Proposed Rules are designed to facilitate the 
implementation of the R&W Plan, particularly DTC's strategy for winding 
down and transferring its business, and are designed to provide DTC 
with the legal basis to implement those aspects of the R&W Plan.
1. Business Overview, Critical Services, and Governance
    The introduction to the R&W Plan would identify the document's 
purpose and its regulatory background, and would outline a summary of 
the R&W Plan. The stated purpose of the R&W Plan is that it is to be 
used by the Board and DTC management in the event DTC encounters 
scenarios that could potentially prevent it from being able to provide 
its critical services as a going concern.
    The R&W Plan would describe DTCC's business profile, provide a 
summary of DTC's services, and identify the intercompany arrangements 
and critical links between DTC and other

[[Page 44383]]

FMIs. DTC states that the overview section would provide a context for 
the R&W Plan by describing DTC's business, organizational structure and 
critical links to other entities. DTC also states that by providing 
this context, this section would facilitate the analysis of the 
potential impact of utilizing the recovery tools set forth in later 
sections of the Recovery Plan, and the analysis of the factors that 
would be addressed in implementing the Wind-down Plan.
    The R&W Plan would provide a description of established links 
between DTC and other FMIs, both domestic and foreign, including 
central securities depositories (``CSDs'') and central counterparties 
(``CCPs''), as well as the twelve U.S. Federal Reserve Banks. DTC 
states that this section of the R&W Plan, which identifies and briefly 
describes DTC's established links, is designed to provide a mapping of 
critical connections and dependencies that may need to be relied on or 
otherwise addressed in connection with the implementation of either the 
Recovery Plan or the Wind-down Plan.
    The R&W Plan would define the criteria for classifying certain of 
DTC's services as ``critical,'' and would identify those critical 
services and the rationale for their classification. This section of 
the R&W Plan would provide an analysis of the potential systemic impact 
from a service disruption, which DTC states is important for evaluating 
how the recovery tools and the wind-down strategy would facilitate and 
provide for the continuation of DTC's critical services to the markets 
it serves. The criteria that would be used to identify a DTC service or 
function as critical would include (1) whether there is a lack of 
alternative providers or products; (2) whether failure of the service 
could impact DTC's ability to perform its book-entry and settlement 
services; (3) whether failure of the service could impact DTC's ability 
to perform its payment system functions; and (4) whether the service is 
interconnected with other participants and processes within the U.S. 
financial system, for example, with other FMIs, settlement banks and 
broker-dealers. The R&W Plan would then list each of those services, 
functions or activities that DTC has identified as ``critical'' based 
on the applicability of these four criteria. The R&W Plan would also 
include a non-exhaustive list of DTC services that are not deemed 
critical.
    DTC states that the evaluation of which services provided by DTC 
are deemed critical is important for purposes of determining how the 
R&W Plan would facilitate the continuity of those services. While DTC's 
Wind-down Plan would provide for the transfer of all critical services 
to a transferee in the event DTC's wind-down is implemented, it would 
anticipate that any non-critical services that are ancillary and 
beneficial to a critical service, or that otherwise have substantial 
user demand from the continuing membership, would also be transferred.
    The R&W Plan would describe the governance structure of both DTCC 
and DTC. This section of the R&W Plan would identify the ownership and 
governance model of these entities at both the Board and management 
levels. The R&W Plan would state that the stages of escalation required 
to manage recovery under the Recovery Plan or to invoke DTC's wind-down 
under the Wind-down Plan would range from relevant business line 
managers up to the Board through DTC's governance structure. The R&W 
Plan would then identify the parties responsible for certain activities 
under both the Recovery Plan and the Wind-down Plan, and would describe 
their respective roles. The R&W Plan would identify the Risk Committee 
of the Board (``Board Risk Committee'') as being responsible for 
oversight of risk management activities at DTC, which include focusing 
on both oversight of risk management systems and processes designed to 
identify and manage various risks faced by DTC as well as oversight of 
DTC's efforts to mitigate systemic risks that could impact those 
markets and the broader financial system.\17\ The R&W Plan would 
identify the DTCC Management Risk Committee (``Management Risk 
Committee'') as primarily responsible for general, day-to-day risk 
management through delegated authority from the Board Risk Committee. 
The R&W Plan would state that the Management Risk Committee has 
delegated specific day-to-day risk management, including management of 
risks addressed through margining systems and related activities, to 
the DTCC Group Chief Risk Office (``GCRO''), which works with staff 
within the DTCC Financial Risk Management group. Finally, the R&W Plan 
would describe the role of the Management Committee, which provides 
overall direction for all aspects of DTC's business, technology, and 
operations and the functional areas that support these activities.
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    \17\ The DTCC, DTC, NSCC, FICC Risk Committee Charter is 
available at http://www.dtcc.com/~/media/Files/Downloads/legal/
policy-and-compliance/DTCC-BOD-Risk-Committee-Charter.pdf.
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    The R&W Plan would describe the governance of recovery efforts in 
response to both default losses and non-default losses under the 
Recovery Plan, identifying the groups responsible for those recovery 
efforts. Specifically, the R&W Plan would state that the Management 
Risk Committee provides oversight of actions relating to the default of 
a Participant, which would be reported and escalated to it through the 
GCRO, and the Management Committee provides oversight of actions 
relating to non-default events that could result in a loss, which would 
be reported and escalated to it from the DTCC Chief Financial Officer 
(``CFO'') and the DTCC Treasury group that reports to the CFO, and from 
other relevant subject matter experts based on the nature and 
circumstances of the non-default event.\18\ More generally, the R&W 
Plan would state that the type of loss and the nature and circumstances 
of the events that lead to the loss would dictate the components of 
governance to address that loss, including the escalation path to 
authorize those actions. Both the Recovery Plan and the Wind-down Plan 
would describe the governance of escalations, decisions, and actions 
under each of those plans.
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    \18\ The R&W Plan would state that these groups would be 
involved to address how to mitigate the financial impact of non-
default losses, and in recommending mitigating actions, the 
Management Committee would consider information and recommendations 
from relevant subject matter experts based on the nature and 
circumstances of the non-default event. Any necessary operational 
response to these events, however, would be managed in accordance 
with applicable incident response/business continuity process.
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    Finally, the R&W Plan would describe the role of the R&R Team in 
managing the overall recovery and wind-down program and plans for each 
of the Clearing Agencies.
2. DTC Recovery Plan
    DTC states that the Recovery Plan is intended to be a roadmap of 
those actions that DTC may employ to monitor and, as needed, stabilize 
its financial condition. DTC also states that as each event that could 
lead to a financial loss could be unique in its circumstances, DTC 
proposes that the Recovery Plan would not be prescriptive and would 
permit DTC to maintain flexibility in its use of identified tools and 
in the sequence in which such tools are used, subject to any conditions 
in the Rules or the contractual arrangement on which such tool is 
based. DTC's Recovery Plan would consist of (1) a description of the 
risk management surveillance, tools, and governance that DTC would 
employ across evolving stress scenarios that it may face as it 
transitions through a Crisis Continuum, described below; (2) a 
description of

[[Page 44384]]

DTC's risk of losses that may result from non-default events, and the 
financial resources and recovery tools available to DTC to manage those 
risks and any resulting losses; and (3) an evaluation of the 
characteristics of the recovery tools that may be used in response to 
either losses arising out of a Participant Default (as defined below) 
or non-default losses. In all cases, DTC states that it would act in 
accordance with the Rules, within the governance structure described in 
the R&W Plan, and in accordance with applicable regulatory oversight to 
address each situation to best protect DTC, its Participants and the 
markets in which it operates.
(i) Managing Participant Default Losses and Liquidity Needs Through the 
Crisis Continuum
    The Recovery Plan would describe the risk management surveillance, 
tools, and governance that DTC may employ across an increasing stress 
environment, which is referred to as the Crisis Continuum. This 
description would identify those tools that can be employed to mitigate 
losses, and mitigate or minimize liquidity needs, as the market 
environment becomes increasingly stressed. The phases of the Crisis 
Continuum would include (1) a stable market phase, (2) a stress market 
phase, (3) a phase commencing with DTC's decision to cease to act for a 
Participant or Affiliated Family of Participants \19\ (referred to in 
the R&W Plan as the ``Participant Default phase''), and (4) a recovery 
phase. In the R&W Plan, the term ``cease to act'' and the actions that 
may lead to such decision are used within the context of the Rules.\20\ 
The R&W Plan would, for purposes of the R&W Plan, use the term 
``Participant Default Losses'' to refer to losses that arise out of or 
relate to the Participant Default and resulting cease to act (including 
any losses that arise from liquidation of the Participant's 
Collateral).
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    \19\ The R&W Plan would define an ``Affiliated Family'' of 
Participants as a number of affiliated entities that are all 
Participants of DTC.
    \20\ See Rule 4 (Participants Fund and Participants Investment), 
Rule 9(A) (Transactions in Securities and Money Payments), Rule 9(B) 
(Transactions in Eligible Securities), Rule 9(C) (Transactions in 
MMI Securities), Rule 10 (Discretionary Termination), Rule 11 
(Mandatory Termination) and Rule 12 (Insolvency), supra note 10. 
Further, the term ``Participant Default'' would also be used in the 
R&W Plan as such term is defined in Rule 4 (Participants Fund and 
Participants Investment), see supra note 10.
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    DTC states that the Recovery Plan would provide context to its 
roadmap through this Crisis Continuum by describing DTC's ongoing 
management of credit, market, and liquidity risk, and its existing 
process for measuring and reporting its risks as they align with 
established thresholds for its tolerance of those risks. DTC also 
states that the Recovery Plan would discuss the management of credit/
market risk and liquidity exposures together because the tools that 
address these risks can be deployed either separately or in a 
coordinated approach in order to address both exposures. DTC states 
that it manages these risk exposures collectively to limit their 
overall impact on DTC and its Participants. DTC states that it has 
built-in mechanisms to limit exposures and replenish financial 
resources used in a stress event, in order to continue to operate in a 
safe and sound manner. DTC states that it is a closed, collateralized 
system in which liquidity resources are matched against risk management 
controls, so, at any time, the potential net settlement obligation of 
the Participant or Affiliated Family of Participants with the largest 
net settlement obligation cannot exceed the amount of liquidity 
resources.\21\ DTC states that while Collateral securities are subject 
to market price risk, DTC manages its liquidity and market risks 
through the calculation of the required deposits to the Participants 
Fund \22\ and risk management controls, i.e., collateral haircuts, the 
Collateral Monitor \23\ and Net Debit Cap.\24\
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    \21\ DTC's liquidity risk management strategy, including the 
manner in which DTC would deploy liquidity tools as well as its 
intraday use of liquidity, is described in the Clearing Agency 
Liquidity Risk Management Framework. See Securities Exchange Act 
Release No. 82377 (December 21, 2017), 82 FR 61617 (December 28, 
2017) (SR-DTC-2017-004, SR-FICC-2017-008, SR-NSCC-2017-005).
    \22\ See Rule 4 (Participants Fund and Participants Investment), 
supra note 10.
    \23\ See Rule 1 (Definitions; Governing Law), Section 1, supra 
note 10. DTC states that credit risk and market risk are closely 
related for DTC, because DTC monitors credit exposures from 
Participants through these risk management controls, which limit 
Participant settlement obligations to the amount of available 
liquidity resources and require those obligations to be fully 
collateralized. The pledge or liquidation of collateral in an amount 
sufficient to restore liquidity resources depends on market values 
and demand, i.e., market risk exposure. DTC states that such risk 
management controls are part of DTC's market risk management 
strategy and are designed to comply with Rule 17Ad-22(e)(4) under 
the Act, where these risks are referred to as ``credit risks.'' See 
17 CFR 240.17Ad-22(e)(4).
    \24\ Id.
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    The Recovery Plan would outline the metrics and indicators that DTC 
has developed to evaluate a stress situation against established risk 
tolerance thresholds. Each risk mitigation tool identified in the 
Recovery Plan would include a description of the escalation thresholds 
that allow for effective and timely reporting to the appropriate 
internal management staff and committees, or to the Board. DTC states 
that the Recovery Plan is designed to make clear that these tools and 
escalation protocols would be calibrated across each phase of the 
Crisis Continuum. The Recovery Plan would also establish that DTC would 
retain the flexibility to deploy such tools either separately or in a 
coordinated approach, and to use other alternatives to these actions 
and tools as necessitated by the circumstances of a particular 
Participant Default event, in accordance with the Rules. Therefore, DTC 
states that the Recovery Plan would both provide DTC with a roadmap to 
follow within each phase of the Crisis Continuum, and would permit it 
to adjust its risk management measures to address the unique 
circumstances of each event.
    The Recovery Plan would describe the conditions that mark each 
phase of the Crisis Continuum, and would identify actions that DTC 
could take as it transitions through each phase in order to both 
prevent losses from materializing through active risk management, and 
to restore the financial health of DTC during a period of stress.
    The stable market phase of the Crisis Continuum would describe 
active risk management activities in the normal course of business. 
These activities would include performing (1) backtests to evaluate the 
adequacy of the collateral level and the haircut sufficiency for 
covering market price volatility and (2) stress testing to cover market 
price moves under real historical and hypothetical scenarios to assess 
the haircut adequacy under extreme but plausible market conditions. The 
backtesting and stress testing results are escalated, as necessary, to 
internal and Board committees.\25\
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    \25\ DTC's stress testing practices are described in the 
Clearing Agency Stress Testing Framework (Market Risk). See 
Securities Exchange Act Release No. 82638 (December 19, 2017), 82 FR 
61082 (December 26, 2017) (SR-DTC-2017-005, SR-FICC-2017-009, SR-
NSCC-2017-006).
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    The Recovery Plan would describe some of the indicators of the 
stress market phase of the Crisis Continuum, which would include, for 
example, volatility in market prices of certain assets where there is 
increased uncertainty among market participants about the fundamental 
value of those assets. This phase would involve general market 
stresses, when no Participant Default would be imminent. Within the 
description of this phase, the Recovery Plan would provide that DTC may 
take targeted, routine risk

[[Page 44385]]

management measures as necessary and as permitted by the Rules.
    Within the Participant Default phase of the Crisis Continuum, the 
Recovery Plan would provide a roadmap for the existing procedures that 
DTC would follow in the event of a Participant Default and any decision 
by DTC to cease to act for that Participant.\26\ The Recovery Plan 
would provide that the objectives of DTC's actions upon a Participant 
Default are to (1) minimize losses and market exposure, and (2), to the 
extent practicable, minimize disturbances to the affected markets. The 
Recovery Plan would describe tools, actions, and related governance for 
both market risk monitoring and liquidity risk monitoring through this 
phase. Management of liquidity risk through this phase would involve 
ongoing monitoring of, among other things, the adequacy of the 
Participants Fund and risk controls, and the Recovery Plan would 
identify certain actions DTC may deploy as it deems necessary to 
mitigate a potential liquidity shortfall. The Recovery Plan would state 
that, throughout this phase, relevant information would be escalated 
and reported to both internal management committees and the Board Risk 
Committee.
---------------------------------------------------------------------------

    \26\ See Rule 10 (Discretionary Termination); Rule 11 (Mandatory 
Termination); Rule 12 (Insolvency), supra note 10.
---------------------------------------------------------------------------

    The Recovery Plan would also identify financial resources available 
to DTC, pursuant to the Rules, to address losses arising out of a 
Participant Default. Specifically, Rule 4 (Participants Fund and 
Participants Investment) provides that losses remaining after 
application of the Defaulting Participant's resources be satisfied 
first by applying a Corporate Contribution, and then, if necessary, by 
allocating remaining losses among the membership in accordance with 
Rule 4 (Participants Fund and Participants Investment).\27\
---------------------------------------------------------------------------

    \27\ See supra note 10. Rule 4 (Participants Fund and 
Participants Investment) defines the amount DTC would contribute to 
address a loss resulting from either a Participant Default or a non-
default event as the Corporate Contribution. This amount is 50 
percent of the General Business Risk Capital Requirement, which is 
calculated pursuant to the Capital Policy and, which DTC states is 
an amount sufficient to cover potential general business losses so 
that DTC can continue operations and services as a going concern if 
those losses materialize, in an effort to comply with Rule 17Ad-
22(e)(15) under the Act. See supra note 13 (concerning the Capital 
Policy); 17 CFR 240.17Ad-22(e)(15).
---------------------------------------------------------------------------

    In order to provide for an effective and timely recovery, the 
Recovery Plan would describe the period of time that would occur near 
the end of the Participant Default phase, during which DTC may 
experience stress events or observe early warning indicators that allow 
it to evaluate its options and prepare for the recovery phase (referred 
to in the R&W Plan as the Recovery Corridor). The Recovery Plan would 
then describe the recovery phase of the Crisis Continuum, which would 
begin on the date that DTC issues the first Loss Allocation Notice of 
the second loss allocation round with respect to a given Event 
Period.\28\ The recovery phase would describe actions that DTC may take 
to avoid entering into a wind-down of its business.
---------------------------------------------------------------------------

    \28\ As provided for in Rule 4 (Participants Fund and 
Participants Investment), the ``Event Period'' is ten Business Days 
beginning on (i) with respect to a Participant Default, the day on 
which DTC notifies Participants that it has ceased to act for a 
Participant, or (ii) with respect to a non-default loss, the day 
that DTC notifies Participants of the determination by the Board 
that there is a non-default loss event. Rule 4 (Participants Fund 
and Participants Investment) defines a ``round'' as a series of loss 
allocations relating to an Event Period, and provides that the first 
Loss Allocation Notice in a first, second, or subsequent round shall 
expressly state that such notice reflects the beginning of a first, 
second, or subsequent round. The maximum allocable loss amount of a 
round is equal to the sum of the Loss Allocation Caps of those 
Participants included in the round. See Rule 4 (Participants Fund 
and Participants Investment), supra note 10.
---------------------------------------------------------------------------

    DTC states that it expects that significant deterioration of 
liquidity resources would cause it to enter the Recovery Corridor. 
Therefore, the R&W Plan would describe the actions DTC may take aimed 
at replenishing those resources. Throughout the Recovery Corridor, DTC 
would monitor the adequacy of its resources and the expected timing of 
replenishment of those resources, and would do so through the 
monitoring of certain corridor indicator metrics.
    DTC states that the majority of the corridor indicators, as 
identified in the Recovery Plan, relate directly to conditions that may 
require DTC to adjust its strategy for hedging and liquidating 
Collateral securities, and any such changes would include an assessment 
of the status of the corridor indicators. For each corridor indicator, 
the Recovery Plan would identify (1) measures of the indicator, (2) 
evaluations of the status of the indicator, (3) metrics for determining 
the status of the deterioration or improvement of the indicator, and 
(4) Corridor Actions, which are steps that may be taken to improve the 
status of the indicator,\29\ as well as management escalations required 
to authorize those steps. DTC states that because DTC has never 
experienced the default of multiple Participants, it has not, 
historically, measured the deterioration or improvements metrics of the 
corridor indicators. Therefore, DTC states that these metrics were 
chosen based on the business judgment of DTC management.
---------------------------------------------------------------------------

    \29\ The Corridor Actions that would be identified in the R&W 
Plan are designed to be indicative, but not prescriptive; therefore, 
if DTC needs to consider alternative actions due to the applicable 
facts and circumstances, the escalation of those alternative actions 
would follow the same escalation protocol identified in the R&W Plan 
for the Corridor Indicator to which the action relates.
---------------------------------------------------------------------------

    The Recovery Plan would also describe the reporting and escalation 
of the status of the corridor indicators throughout the Recovery 
Corridor. Significant deterioration of a corridor indicator, as 
measured by the metrics set out in the Recovery Plan, would be 
escalated to the Board. DTC management would review the corridor 
indicators and the related metrics at least annually, and would modify 
these metrics as necessary in light of observations from simulations of 
Participant Defaults and other analyses. Any proposed modifications 
would be reviewed by the Management Risk Committee and the Board Risk 
Committee. The Recovery Plan would estimate that DTC may remain in the 
Recovery Corridor stage between one day and two weeks. DTC states that 
this estimate is based on historical data observed in past Participant 
Default events, the results of simulations of Participant Defaults, and 
periodic liquidity analyses conducted by DTC. DTC states that the 
actual length of a Recovery Corridor would vary based on actual market 
conditions observed at the time, and DTC would expect the Recovery 
Corridor to be shorter in market conditions of increased stress.
    The Recovery Plan would outline steps by which DTC may allocate its 
losses, which would occur when and in the order provided in Rule 4 
(Participants Fund and Participants Investment).\30\ The Recovery Plan 
would also identify tools that may be used to address foreseeable 
shortfalls of DTC's liquidity resources following a Participant 
Default, and would provide that these tools may be used as appropriate 
during the Crisis Continuum to address liquidity shortfalls if they 
arise. DTC states that the goal in managing DTC's liquidity resources 
is to maximize resource availability in an evolving stress situation, 
to maintain flexibility in the order and use of sources of liquidity, 
and to repay any third party lenders in a timely manner. DTC states 
that the Recovery Plan would state that the availability and capacity 
of these liquidity tools cannot be accurately predicted and are 
dependent on the circumstances of the applicable stress

[[Page 44386]]

period, including market price volatility, actual or perceived 
disruptions in financial markets, the costs to DTC of utilizing these 
tools, and any potential impact on DTC's credit rating.
---------------------------------------------------------------------------

    \30\ See supra note 10.
---------------------------------------------------------------------------

    The Recovery Plan would state that DTC will have entered the 
recovery phase on the date that it issues the first Loss Allocation 
Notice of the second loss allocation round with respect to a given 
Event Period. The Recovery Plan would provide that, during the recovery 
phase, DTC would continue and, as needed, enhance, the monitoring and 
remedial actions already described in connection with previous phases 
of the Crisis Continuum, and would remain in the recovery phase until 
its financial resources are expected to be or are fully replenished, or 
until the Wind-down Plan is triggered.
    The Recovery Plan would describe governance for the actions and 
tools that may be employed within each phase of the Crisis Continuum, 
which would be dictated by the facts and circumstances applicable to 
the situation being addressed. Such facts and circumstances would be 
measured by the various indicators and metrics applicable to that phase 
of the Crisis Continuum, and would follow relevant escalation protocol 
that would be described in the Recovery Plan. The Recovery Plan would 
also describe the governance procedures around a decision to cease to 
act for a Participant, pursuant to the Rules, and around the management 
and oversight of the subsequent liquidation of Collateral securities. 
The Recovery Plan would state that, overall, DTC would retain 
flexibility in accordance with the Rules, its governance structure, and 
its regulatory oversight, to address a particular situation in order to 
best protect DTC and its Participants, and to meet the primary 
objectives, throughout the Crisis Continuum, of minimizing losses and, 
where consistent and practicable, minimizing disturbance to affected 
markets.
(ii) Non-Default Losses
    The Recovery Plan would outline how DTC may address losses that 
result from events other than a Participant Default. While these 
matters are addressed in greater detail in other documents, this 
section of the R&W Plan would provide a roadmap to those documents and 
an outline for DTC's approach to monitoring and managing losses that 
could result from a non-default event. The R&W Plan would first 
identify some of the risks DTC faces that could lead to these losses, 
which include, for example, (1) the business and profit/loss risks of 
unexpected declines in revenue or growth of expenses; (2) the 
operational risks of disruptions to systems or processes that could 
lead to large losses, including those resulting from, for example, a 
cyber-attack; and (3) custody or investment risks that could lead to 
financial losses. The Recovery Plan would describe DTC's overall 
strategy for the management of these risks, which includes a ``three 
lines of defense'' approach to risk management that allows for 
comprehensive management of risk across the organization.\31\ The 
Recovery Plan would also describe DTC's approach to financial risk and 
capital management. The R&W Plan would identify key aspects of this 
approach, including, for example, an annual budget process, business 
line performance reviews with management, and regular review of capital 
requirements against LNA. These risk management strategies are 
collectively intended to allow DTC to effectively identify, monitor, 
and manage risks of non-default losses.
---------------------------------------------------------------------------

    \31\ DTC states that the ``three lines of defense'' approach to 
risk management includes (1) a first line of defense comprised of 
the various business lines and functional units that support the 
products and services offered by DTC; (2) a second line of defense 
comprised of control functions that support DTC, including the risk 
management, legal and compliance areas; and (3) a third line of 
defense, which is performed by an internal audit group. The Clearing 
Agency Risk Management Framework includes a description of this 
``three lines of defense'' approach to risk management, and 
addresses how DTC comprehensively manages various risks, including 
operational, general business, investment, custody, and other risks 
that arise in or are borne by it. Securities Exchange Act Release 
No. 81635 (September 15, 2017), 82 FR 44224 (September 21, 2017) 
(SR-DTC-2017-013, SR-FICC-2017-016, SR-NSCC-2017-012). The Clearing 
Agency Operational Risk Management Framework describes the manner in 
which DTC manages operational risks, as defined therein. Securities 
Exchange Act Release No. 81745 (September 28, 2017), 82 FR 46332 
(October 4, 2017) (SR-DTC-2017-014, SR-FICC-2017-017, SR-NSCC-2017-
013).
---------------------------------------------------------------------------

    The R&W Plan would identify the two categories of financial 
resources DTC maintains to cover losses and expenses arising from non-
default risks or events as (1) LNA, maintained, monitored, and managed 
pursuant to the Capital Policy, which include (a) amounts held in 
satisfaction of the General Business Risk Capital Requirement,\32\ (b) 
the Corporate Contribution,\33\ and (c) other amounts held in excess of 
DTC's capital requirements pursuant to the Capital Policy; and (2) 
resources available pursuant to the loss allocation provisions of Rule 
4 (Participants Fund and Participants Investment).\34\
---------------------------------------------------------------------------

    \32\ See supra note 27.
    \33\ See supra note 27.
    \34\ See supra note 10.
---------------------------------------------------------------------------

    The R&W Plan would address the process by which the CFO and the 
DTCC Treasury group would determine which available LNA resources are 
most appropriate to cover a loss that is caused by a non-default event. 
This determination involves an evaluation of a number of factors, 
including the current and expected size of the loss, the expected time 
horizon over when the loss or additional expenses would materialize, 
the current and projected available LNA, and the likelihood LNA could 
be successfully replenished pursuant to the Replenishment Plan, if 
triggered.\35\ Finally the R&W Plan would discuss how DTC would apply 
its resources to address losses resulting from a non-default event, 
including the order of resources it would apply if the loss or 
liability is expected to exceed DTC's excess LNA amounts, or is large 
relative thereto, and the Board has declared the event a Declared Non-
Default Loss Event pursuant to Rule 4 (Participants Fund and 
Participants Investment).\36\
---------------------------------------------------------------------------

    \35\ See supra note 13 (concerning the Capital Policy).
    \36\ See supra note 10.
---------------------------------------------------------------------------

    The R&W Plan would also describe proposed Rule 38 (Market 
Disruption and Force Majeure), which DTC is proposing to adopt in the 
Rules. DTC states that this Proposed Rule is designed to provide 
transparency around how DTC would address extraordinary events that may 
occur outside its control. Specifically, the Proposed Rule would define 
a Market Disruption Event and the governance around a determination 
that such an event has occurred. The Proposed Rule would also describe 
DTC's authority to take actions during the pendency of a Market 
Disruption Event that it deems appropriate to address such an event and 
facilitate the continuation of its services, if practicable.
    The R&W Plan would describe the interaction between the Proposed 
Rule and DTC's existing processes and procedures addressing business 
continuity management and disaster recovery (generally, the ``BCM/DR 
procedures''). DTC states that the intent is to make clear that the 
Proposed Rule is designed to support those BCM/DR procedures and to 
address circumstances that may be exogenous to DTC and not necessarily 
addressed by the BCM/DR procedures. Finally, the R&W Plan would 
describe that, because the operation of the Proposed Rule is specific 
to each applicable Market Disruption Event, the Proposed Rule does not 
define a time limit on its application. However, the R&W Plan

[[Page 44387]]

would note that actions authorized by the Proposed Rule would be 
limited to the pendency of the applicable Market Disruption Event, as 
made clear in the Proposed Rule. DTC states that, overall, the Proposed 
Rule is designed to mitigate risks caused by Market Disruption Events 
and, thereby, minimize the risk of financial loss that may result from 
such events.
(iii) Recovery Tool Characteristics
    The Recovery Plan would describe DTC's evaluation of the tools 
identified within the Recovery Plan, and its rationale for concluding 
that such tools are comprehensive, effective, and transparent, and that 
such tools provide incentives to Participants and minimize negative 
impact on Participants and the financial system.
3. DTC Wind-Down Plan
    The Wind-down Plan would provide the framework and strategy for the 
orderly wind-down of DTC if the use of the recovery tools described in 
the Recovery Plan do not successfully return DTC to financial 
viability. DTC states that, while DTC believes that such event is 
extremely unlikely, given the comprehensive nature of the recovery 
tools, DTC is proposing a wind-down strategy that provides for (1) the 
transfer of DTC's business, assets, securities inventory, and 
membership to another legal entity, (2) such transfer being effected in 
connection with proceedings under Chapter 11 of the U.S. Bankruptcy 
Code,\37\ and (3) after effectuating this transfer, DTC liquidating any 
remaining assets in an orderly manner in bankruptcy proceedings. DTC 
states that the proposed transfer approach to a wind-down would meet 
its objectives of (1) assuring that DTC's critical services will be 
available to the market as long as there are Participants in good 
standing, and (2) minimizing disruption to the operations of 
Participants and financial markets generally that might be caused by 
DTC's failure.
---------------------------------------------------------------------------

    \37\ 11 U.S.C. 101 et seq.
---------------------------------------------------------------------------

    In describing the transfer approach to DTC's Wind-down Plan, the 
R&W Plan would identify the factors that DTC considered in developing 
this approach, including the fact that DTC does not own material assets 
that are unrelated to its clearance and settlement activities. 
Therefore, a business reorganization or ``bail-in'' of debt approach 
would be unlikely to mitigate significant losses. Additionally, DTC 
states that its approach was developed in consideration of its critical 
and unique position in the U.S. markets, which precludes any approach 
that would cause DTC's critical services to no longer be available.
    First, the Wind-down Plan would describe the potential scenarios 
that could lead to the wind-down of DTC, and the likelihood of such 
scenarios. The Wind-down Plan would identify the time period leading up 
to a decision to wind-down DTC as the Runway Period. DTC states that 
this period would follow the implementation of any recovery tools, as 
it may take a period of time, depending on the severity of the market 
stress at that time, for these tools to be effective or for DTC to 
realize a loss sufficient to cause it to be unable to borrow to 
complete settlement and to repay such borrowings.\38\ The Wind-down 
Plan would identify some of the indicators that DTC has entered the 
Runway Period.
---------------------------------------------------------------------------

    \38\ The Wind-down Plan would state that, given DTC's position 
as a user-governed financial market utility, it is possible that its 
Participants might voluntarily elect to provide additional support 
during the recovery phase leading up to a potential trigger of the 
Wind-down Plan, but would also be designed to make clear that DTC 
cannot predict the willingness of Participants to do so.
---------------------------------------------------------------------------

    The trigger for implementing the Wind-down Plan would be a 
determination by the Board that recovery efforts have not been, or are 
unlikely to be, successful in returning DTC to viability as a going 
concern. As described in the R&W Plan, DTC states that this is an 
appropriate trigger because it is both broad and flexible enough to 
cover a variety of scenarios, and would align incentives of DTC and 
Participants to avoid actions that might undermine DTC's recovery 
efforts. Additionally, DTC states that this approach takes into account 
the characteristics of DTC's recovery tools and enables the Board to 
consider (1) the presence of indicators of a successful or unsuccessful 
recovery, and (2) potential for knock-on effects of continued iterative 
application of DTC's recovery tools.
    The Wind-down Plan would describe the general objectives of the 
transfer strategy, and would address assumptions regarding the transfer 
of DTC's critical services, business, assets, securities inventory, and 
membership \39\ to another legal entity that is legally, financially, 
and operationally able to provide DTC's critical services to entities 
that wish to continue their membership following the transfer 
(``Transferee''). The Wind-down Plan would provide that the Transferee 
would be either (1) a third party legal entity, which may be an 
existing or newly established legal entity or a bridge entity formed to 
operate the business on an interim basis to enable the business to be 
transferred subsequently (``Third Party Transferee''); or (2) an 
existing, debt-free failover legal entity established ex-ante by DTCC 
(``Failover Transferee'') to be used as an alternative Transferee in 
the event that no viable or preferable Third Party Transferee timely 
commits to acquire DTC's business. DTC would seek to identify the 
proposed Transferee, and negotiate and enter into transfer arrangements 
during the Runway Period and prior to making any filings under Chapter 
11 of the U.S. Bankruptcy Code.\40\ The Wind-down Plan would anticipate 
that the transfer to the Transferee, including the transfer and 
establishment of the Participant and Pledgee securities accounts on the 
books of the Transferee, be effected in connection with proceedings 
under Chapter 11 of the U.S. Bankruptcy Code, and pursuant to a 
bankruptcy court order under Section 363 of the Bankruptcy Code, with 
the intent that the transfer be free and clear of claims against, and 
interests in, DTC, except to the extent expressly provided in the 
court's order.\41\
---------------------------------------------------------------------------

    \39\ Arrangements with FAST Agents and DRS Agents (each as 
defined in proposed Rule 32(A)) and with Settling Banks would also 
be assigned to the Transferee, so that the approach would be 
transparent to issuers and their transfer agents, as well as to 
Settling Banks.
    \40\ 11 U.S.C. 101 et seq.
    \41\ See 11 U.S.C. 363.
---------------------------------------------------------------------------

    DTC states that in order to effect a timely transfer of its 
services and minimize the market and operational disruption of such 
transfer, DTC would expect to transfer all of its critical services and 
any non-critical services that are ancillary and beneficial to a 
critical service, or that otherwise have substantial user demand from 
the continuing membership. Given the transfer of the securities 
inventory and the establishment on the books of the Transferee 
Participant and Pledgee securities accounts, DTC anticipates that, 
following the transfer, it would not itself continue to provide any 
services, critical or not. Following the transfer, the Wind-down Plan 
would anticipate that the Transferee and its continuing membership 
would determine whether to continue to provide any transferred non-
critical service on an ongoing basis, or terminate the non-critical 
service following some transition period. DTC's Wind-down Plan would 
anticipate that the Transferee would enter into a transition services 
agreement with DTCC so that DTCC would continue to provide the shared 
services it currently provides to DTC, including staffing, 
infrastructure and operational support.

[[Page 44388]]

The Wind-down Plan would also anticipate the assignment of DTC's 
``inbound'' link arrangements to the Transferee. The Wind-down Plan 
would provide that in the case of ``outbound'' links, DTC would seek to 
have the linked FMIs agree, at a minimum, to accept the Transferee as a 
link party for a transition period.\42\
---------------------------------------------------------------------------

    \42\ The proposed transfer arrangements outlined in the Wind-
down Plan do not contemplate the transfer of any credit or funding 
agreements, which are generally not assignable by DTC. However, to 
the extent the Transferee adopts rules substantially identical to 
those DTC has in effect prior to the transfer, DTC states that it 
would have the benefit of any rules-based liquidity funding. The 
Wind-down Plan contemplates that no Participants Fund would be 
transferred to the Transferee, as it is not held in a bankruptcy 
remote manner and it is the primary prefunded liquidity resource to 
be accessed in the recovery phase.
---------------------------------------------------------------------------

    The Wind-down Plan would provide that, following the effectiveness 
of the transfer to the Transferee, the wind-down of DTC would involve 
addressing any residual claims against DTC through the bankruptcy 
process and liquidating the legal entity. The Wind-down Plan does not 
contemplate DTC continuing to provide services in any capacity 
following the transfer time, and any services not transferred would be 
terminated.
    The Wind-down Plan would also identify the key dependencies for the 
effectiveness of the transfer, which include regulatory approvals that 
would permit the Transferee to be legally qualified to provide the 
transferred services from and after the transfer, and approval by the 
applicable bankruptcy court of, among other things, the proposed sale, 
assignments, and transfers to the Transferee.
    The Wind-down Plan would address governance matters related to the 
execution of the transfer of DTC's business and its wind-down. The 
Wind-down Plan would address the duties of the Board to execute the 
wind-down of DTC in conformity with (1) the Rules, (2) the Board's 
fiduciary duties, which mandate that it exercise reasonable business 
judgment in performing these duties, and (3) DTC's regulatory 
obligations under the Act as a registered clearing agency. The Wind-
down Plan would also identify certain factors the Board may consider in 
making these decisions, which would include, for example, whether DTC 
could safely stabilize the business and protect its value without 
seeking bankruptcy protection, and DTC's ability to continue to meet 
its regulatory requirements.
    The Wind-down Plan would describe (1) actions DTC or DTCC may take 
to prepare for wind-down in the period before DTC experiences any 
financial distress, (2) actions DTC would take both during the recovery 
phase and the Runway Period to prepare for the execution of the Wind-
down Plan, and (3) actions DTC would take upon commencement of 
bankruptcy proceedings to effectuate the Wind-down Plan.
    Finally, the Wind-down Plan would include an analysis of the 
estimated time and costs to effectuate the R&W Plan, and would provide 
that this estimate be reviewed and approved by the Board annually. In 
order to estimate the length of time it might take to achieve a 
recovery or orderly wind-down of DTC's critical operations, as 
contemplated by the R&W Plan, the Wind-down Plan would include an 
analysis of the possible sequencing and length of time it might take to 
complete an orderly wind-down and transfer of critical operations, as 
described in earlier sections of the R&W Plan. The Wind-down Plan would 
also include in this analysis consideration of other factors, including 
the time it might take to complete any further attempts at recovery 
under the Recovery Plan. The Wind-down Plan would then multiply this 
estimated length of time by DTC's average monthly operating expenses, 
including adjustments to account for changes to DTC's profit and 
expense profile during these circumstances, over the previous twelve 
months to determine the amount of LNA that it should hold to achieve a 
recovery or orderly wind-down of DTC's critical operations. The 
estimated wind-down costs would constitute the Recovery/Wind-down 
Capital Requirement under the Capital Policy.\43\ Under that policy, 
the General Business Risk Capital Requirement is calculated as the 
greatest of three estimated amounts, one of which is this Recovery/
Wind-down Capital Requirement.\44\
---------------------------------------------------------------------------

    \43\ See supra note 13.
    \44\ See supra note 13.
---------------------------------------------------------------------------

    DTC states that the R&W Plan is designed as a roadmap, and the 
types of actions that may be taken both leading up to and in connection 
with implementation of the Wind-down Plan would be primarily addressed 
in other supporting documentation referred to therein.
    The Wind-down Plan would address proposed Rule 32(A) (Wind-down of 
the Corporation), which would be adopted to facilitate the 
implementation of the Wind-down Plan, as discussed below.

B. Proposed Rules

    In connection with the adoption of the R&W Plan, DTC proposes to 
adopt the Proposed Rules, each of which is described below. DTC states 
that the Proposed Rules are designed to facilitate the execution of the 
R&W Plan and are designed to provide Participants with transparency as 
to critical aspects of the R&W Plan, particularly as they relate to the 
rights and responsibilities of both DTC and its Participants. DTC also 
states that the Proposed Rules are designed to provide a legal basis to 
these aspects of the R&W Plan.
1. Rule 32(A) (Wind-Down of the Corporation
    DTC states that the proposed Rule 32(A) (``Wind-down Rule'') is 
designed to facilitate the execution of the Wind-down Plan. The Wind-
down Rule would include a proposed set of defined terms that would be 
applicable only to the provisions of this Proposed Rule. DTC states 
that the Wind-down Rule is designed to make clear that a wind-down of 
DTC's business would occur (1) after a decision is made by the Board, 
and (2) in connection with the transfer of DTC's services to a 
Transferee, as described therein. DTC states that, generally, the 
proposed Wind-down Rule is designed to create clear mechanisms for the 
transfer of Eligible Participants and Pledgees, Settling Banks, DRS 
Agents, and FAST Agents (as these terms would be defined in the Wind-
down Rule), and DTC's inventory of financial assets in order to provide 
for continued access to critical services and to minimize disruption to 
the markets in the event the Wind-down Plan is initiated.
(i) Wind-Down Trigger
    First, DTC states that the Proposed Rule is designed to make clear 
that the Board is responsible for initiating the Wind-down Plan, and 
would identify the criteria the Board would consider when making this 
determination. As provided for in the Wind-down Plan and in the 
proposed Wind-down Rule, the Board would initiate the Wind-down Plan 
if, in the exercise of its business judgment and subject to its 
fiduciary duties, it has determined that the execution of the Recovery 
Plan has not or is not likely to restore DTC to viability as a going 
concern, and the implementation of the Wind-down Plan, including the 
transfer of DTC's business, is in the best interests of DTC, its 
Participants and Pledgees, its shareholders and creditors, and the U.S. 
financial markets.

[[Page 44389]]

(ii) Identification of Critical Services; Designation of Dates and 
Times for Specific Actions
    The Proposed Rule would provide that, upon making a determination 
to initiate the Wind-down Plan, the Board would identify the critical 
and non-critical services that would be transferred to the Transferee 
at the Transfer Time (as defined in the Proposed Rule), as well as any 
non-critical services that would not be transferred to the Transferee. 
The proposed Wind-down Rule would establish that any services 
transferred to the Transferee will only be provided by the Transferee 
as of the Transfer Time, and that any non-critical services that are 
not transferred to the Transferee would be terminated at the Transfer 
Time. The Proposed Rule would also provide that the Board would 
establish (1) an effective time for the transfer of DTC's business to a 
Transferee (``Transfer Time''), and (2) the last day that instructions 
in respect of securities and other financial products may be 
effectuated through the facilities of DTC (the ``Last Activity Date''). 
DTC states that the Proposed Rule is designed to make clear that DTC 
would not accept any transactions for settlement after the Last 
Activity Date. Any transactions to be settled after the Transfer Time 
would be required to be submitted to the Transferee, and would not be 
DTC's responsibility.
(iii) Notice Provisions
    The proposed Wind-down Rule would provide that, upon a decision to 
implement the Wind-down Plan, DTC would provide its Participants, 
Pledgees, DRS Agents, FAST Agents, Settling Banks and regulators with a 
notice that includes material information relating to the Wind-down 
Plan and the anticipated transfer of DTC's Participants and business, 
including, for example, (1) a brief statement of the reasons for the 
decision to implement the Wind-down Plan; (2) identification of the 
Transferee and information regarding the transaction by which the 
transfer of DTC's business would be effected; (3) the Transfer Time and 
Last Activity Date; and (4) identification of Participants and the 
critical and non-critical services that would be transferred to the 
Transferee at the Transfer Time, as well as those Non-Eligible 
Participants (as defined below and in the Proposed Rule) and any non-
critical services that would not be included in the transfer. DTC would 
also make available the rules and procedures and membership agreements 
of the Transferee.
(iv) Transfer of Membership
    The proposed Wind-down Rule would address the expected transfer of 
DTC's membership to the Transferee, which DTC would seek to effectuate 
by entering into an arrangement with a Failover Transferee, or by using 
commercially reasonable efforts to enter into such an arrangement with 
a Third Party Transferee. Thus, under the proposal, in connection with 
the implementation of the Wind-down Plan and with no further action 
required by any party:
    (1) Each Eligible Participant would become (i) a Participant of the 
Transferee and (ii) a party to a Participants agreement with the 
Transferee;
    (2) each Participant that is delinquent in the performance of any 
obligation to DTC or that has provided notice of its election to 
withdraw as a Participant (a ``Non-Eligible Participant'') as of the 
Transfer Time would become (i) the holder of a transition period 
securities account maintained by the Transferee on its books 
(``Transition Period Securities Account'') and (ii) a party to a 
Transition Period Securities Account agreement of the Transferee;
    (3) each Pledgee would become (i) a Pledgee of the Transferee and 
(ii) a party to a Pledgee agreement with the Transferee;
    (4) each DRS Agent would become (i) a DRS Agent of the Transferee 
and (ii) a party to a DRS Agent agreement with the Transferee;
    (5) each FAST Agent would become (i) a FAST Agent of the Transferee 
and (ii) a party to a FAST Agent agreement with the Transferee; and
    (6) each Settling Bank for Participants and Pledgees would become 
(i) a Settling Bank for Participants and Pledgees of the Transferee and 
(ii) a party to a Settling Bank Agreement with the Transferee.
    Further, DTC states that the Proposed Rule is designed to make 
clear that it would not prohibit (1) Non-Eligible Participants from 
applying for membership with the Transferee, (2) Non-Eligible 
Participants that have become holders of Transition Period Securities 
Accounts (``Transition Period Securities Account Holders'') of the 
Transferee from withdrawing as a Transition Period Securities Account 
Holder from the Transferee, subject to the rules and procedures of the 
Transferee, and (3) Participants, Pledgees, DRS Agents, FAST Agents, 
and Settling Banks that would be transferred to the Transferee from 
withdrawing from membership with the Transferee, subject to the rules 
and procedures of the Transferee. Under the Proposed Rule, Non-Eligible 
Participants that have become Transition Period Securities Account 
Holders of the Transferee shall have the rights and be subject to the 
obligations of Transition Period Securities Account Holders set forth 
in special provisions of the rules and procedures of the Transferee 
applicable to such Transition Period Securities Account Holder. 
Specifically, Non-Eligible Participants that become Transition Period 
Securities Account Holders must, within the Transition Period (as 
defined in the Proposed Rule), instruct the Transferee to transfer the 
financial assets credited to its Transition Period Securities Account 
(i) to a Participant of the Transferee through the facilities of the 
Transferee or (ii) to a recipient outside the facilities of the 
Transferee, and no additional financial assets may be delivered versus 
payment to a Transition Period Securities Account during the Transition 
Period.
(v) Transfer of Inventory of Financial Assets
    The proposed Wind-down Rule would provide that DTC would enter into 
arrangements with a Failover Transferee, or would use commercially 
reasonable efforts to enter into arrangements with a Third Party 
Transferee, providing that, in either case, at Transfer Time:
    (1) DTC would transfer to the Transferee (i) its rights with 
respect to its nominee Cede & Co. (``Cede'') (and thereby its rights 
with respect to the financial assets owned of record by Cede), (ii) the 
financial assets held by it at the FRBNY, (iii) the financial assets 
held by it at other CSDs, (iv) the financial assets held in custody for 
it with FAST Agents, (v) the financial assets held in custody for it 
with other custodians and (vi) the financial assets it holds in 
physical custody.
    (2) The Transferee would establish security entitlements on its 
books for Eligible Participants of DTC that become Participants of the 
Transferee that replicate the security entitlements that DTC maintained 
on its books immediately prior to the Transfer Time for such Eligible 
Participants, and DTC would simultaneously eliminate such security 
entitlements from its books.
    (3) The Transferee would establish security entitlements on its 
books for Non-Eligible Participants of DTC that become Transition 
Period Securities Account Holders of the Transferee that replicate the 
security entitlements that DTC maintained on its books immediately 
prior to the Transfer Time for such Non-Eligible Participants, and

[[Page 44390]]

DTC would simultaneously eliminate such security entitlements from its 
books.
    (4) The Transferee would establish pledges on its books in favor of 
Pledgees that become Pledgees of the Transferee that replicate the 
pledges that DTC maintained on its books immediately prior to the 
Transfer Time in favor of such Pledgees, and DTC shall simultaneously 
eliminate such pledges from its books.
(vi) Comparability Period
    DTC states that the proposed automatic mechanism for the transfer 
of DTC's membership is intended to provide DTC's membership with 
continuous access to critical services in the event of DTC's wind-down, 
and to facilitate the continued prompt and accurate clearance and 
settlement of securities transactions. The proposed Wind-down Rule 
would provide that DTC would enter into arrangements with a Failover 
Transferee, or would use commercially reasonable efforts to enter into 
arrangements with a Third Party Transferee, providing that, in either 
case, with respect to the critical services and any non-critical 
services that are transferred from DTC to the Transferee, for at least 
a period of time to be agreed upon (``Comparability Period''), the 
business transferred from DTC to the Transferee would be operated in a 
manner that is comparable to the manner in which the business was 
previously operated by DTC. Specifically, the proposed Wind-down Rule 
would provide that: (1) The rules of the Transferee and terms of 
Participant, Pledgee, DRS Agent, FAST Agent and Settling Bank 
agreements would be comparable in substance and effect to the analogous 
Rules and agreements of DTC, (2) the rights and obligations of any 
Participants, Pledgees, DRS Agents, FAST Agents, and Settling Banks 
that are transferred to the Transferee would be comparable in substance 
and effect to their rights and obligations as to DTC, and (3) the 
Transferee would operate the transferred business and provide any 
services that are transferred in a comparable manner to which such 
services were provided by DTC.
    DTC states that the purpose of these provisions and the intended 
effect of the proposed Wind-down Rule is to facilitate a smooth 
transition of DTC's business to a Transferee and to provide that, for 
at least the Comparability Period, the Transferee (1) would operate the 
transferred business in a manner that is comparable in substance and 
effect to the manner in which the business was operated by DTC, and (2) 
would not require sudden and disruptive changes in the systems, 
operations and business practices of the new Participants, Pledgees, 
DRS Agents, FAST Agents, and Settling Banks of the Transferee.
(vii) Subordination of Claims Provisions and Miscellaneous Matters
    The proposed Wind-down Rule would include a provision addressing 
the subordination of unsecured claims against DTC of its Participants 
who fail to participate in DTC's recovery efforts (i.e., firms 
delinquent in their obligations to DTC or elect to retire from DTC in 
order to minimize their obligations with respect to the allocation of 
losses, pursuant to the Rules). DTC states that this provision is 
designed to incentivize Participants to participate in DTC's recovery 
efforts.\45\
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    \45\ Nothing in the proposed Wind-down Rule would seek to 
prevent a Participant that retired its membership at DTC from 
applying for membership with the Transferee. Once its DTC membership 
is terminated, however, such firm would not be able to benefit from 
the membership assignment that would be effected by this proposed 
Wind-down Rule, and it would have to apply for membership directly 
with the Transferee, subject to its membership application and 
review process.
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    The proposed Wind-down Rule would address other ex-ante matters, 
including provisions providing that its Participants, Pledgees, DRS 
Agents, FAST Agents and Settling Banks (1) will assist and cooperate 
with DTC to effectuate the transfer of DTC's business to a Transferee, 
(2) consent to the provisions of the rule, and (3) grant DTC power of 
attorney to execute and deliver on their behalf documents and 
instruments that may be requested by the Transferee. Finally, the 
Proposed Rule would include a limitation of liability for any actions 
taken or omitted to be taken by DTC pursuant to the Proposed Rule.
    DTC states that the purpose of the limitation of liability is to 
facilitate and protect DTC's ability to act expeditiously in response 
to extraordinary events. Such limitation of liability would be 
available only following triggering of the Wind-down Plan. In addition, 
and as a separate matter, DTC states that the limitation of liability 
provides Participants with transparency for the unlikely situation when 
those extraordinary events could occur, as well as supporting the legal 
framework within which DTC would take such actions. DTC states that 
these provisions, collectively, are designed to enable DTC to take such 
acts as the Board determines necessary to effectuate an orderly 
transfer and wind-down of its business should recovery efforts prove 
unsuccessful.
2. Rule 38 (Market Disruption and Force Majeure)
    The proposed Rule 38 (``Force Majeure Rule'') would address DTC's 
authority to take certain actions upon the occurrence, and during the 
pendency, of a Market Disruption Event, as defined therein. DTC states 
that the Proposed Rule is designed to clarify DTC's ability to take 
actions to address extraordinary events outside of the control of DTC 
and of its membership, and to mitigate the effect of such events by 
facilitating the continuity of services (or, if deemed necessary, the 
temporary suspension of services). To that end, under the proposed 
Force Majeure Rule, DTC would be entitled, during the pendency of a 
Market Disruption Event, to (1) suspend the provision of any or all 
services, and (2) take, or refrain from taking, or require its 
Participants and Pledgees to take, or refrain from taking, any actions 
it considers appropriate to address, alleviate, or mitigate the event 
and facilitate the continuation of DTC's services as may be 
practicable.
    The proposed Force Majeure Rule would identify the events or 
circumstances that would be considered a Market Disruption Event. The 
proposed Force Majeure Rule would define the governance procedures for 
how DTC would determine whether, and how, to implement the provisions 
of the rule. A determination that a Market Disruption Event has 
occurred would generally be made by the Board, but the Proposed Rule 
would provide for limited, interim delegation of authority to a 
specified officer or management committee if the Board would not be 
able to take timely action. In the event such delegated authority is 
exercised, the proposed Force Majeure Rule would require that the Board 
be convened as promptly as practicable, no later than five Business 
Days after such determination has been made, to ratify, modify, or 
rescind the action. The proposed Force Majeure Rule would also provide 
for prompt notification to the Commission, and advance consultation 
with Commission staff, when practicable, including notification when an 
event is no longer continuing and the relevant actions are terminated. 
The Proposed Rule would require Participants and Pledgees to notify DTC 
immediately upon becoming aware of a Market Disruption Event, and, 
likewise, would require DTC to notify its Participants and Pledgees if 
it has triggered the Proposed Rule and of actions taken or intended to 
be taken thereunder.
    Finally, the Proposed Rule would address other related matters, 
including

[[Page 44391]]

a limitation of liability for any failure or delay in performance, in 
whole or in part, arising out of the Market Disruption Event. DTC 
states that the purpose of the limitation of liability would be similar 
to the purpose of the analogous provision in the proposed Wind-down 
Rule, which is to facilitate and protect DTC's ability to act 
expeditiously in response to extraordinary events.

II. Discussion and Commission Findings

    Although the Clearing Supervision Act does not specify a standard 
of review for an advance notice, its stated purpose is instructive: to 
mitigate systemic risk in the financial system and promote financial 
stability by, among other things, promoting uniform risk management 
standards for systemically important financial market utilities and 
strengthening the liquidity of systemically important financial market 
utilities.\46\
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    \46\ See 12 U.S.C. 5461(b).
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    Section 805(a)(2) of the Clearing Supervision Act \47\ authorizes 
the Commission to prescribe risk management standards for the payment, 
clearing and settlement activities of designated clearing entities 
engaged in designated activities for which the Commission is the 
supervisory agency. Section 805(b) of the Clearing Supervision Act \48\ 
provides the following objectives and principles for the Commission's 
risk management standards prescribed under Section 805(a):
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    \47\ 12 U.S.C. 5464(a)(2).
    \48\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

     To promote robust risk management;
     to promote safety and soundness;
     to reduce systemic risks; and
     to support the stability of the broader financial system.
    The Commission has adopted risk management standards under Section 
805(a)(2) of the Clearing Supervision Act \49\ and Section 17A of the 
Act \50\ (``Rule 17Ad-22'').\51\ Rule 17Ad-22 requires registered 
clearing agencies to establish, implement, maintain, and enforce 
written policies and procedures that are reasonably designed to meet 
certain minimum requirements for their operations and risk management 
practices on an ongoing basis.\52\ Therefore, it is appropriate for the 
Commission to review proposed changes in advance notices against the 
objectives and principles of these risk management standards as 
described in Section 805(b) of the Clearing Supervision Act \53\ and 
against Rule 17Ad-22.\54\
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    \49\ 12 U.S.C. 5464(a)(2).
    \50\ 15 U.S.C. 78q-1.
    \51\ See 17 CFR 240.17Ad-22.
    \52\ Id.
    \53\ 12 U.S.C. 5464(b).
    \54\ See 17 CFR 240.17Ad-22.
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A. Consistency With Section 805(b) of the Clearing Supervision Act

    The Commission believes that the proposed changes in the Advance 
Notice are designed to help DTC promote robust risk management, promote 
safety and soundness, reduce systemic risks, and support the stability 
of the broader financial system. As described above, the R&W Plan, 
generally, would help DTC promote robust risk management and reduce 
systemic risks by providing DTC with a roadmap for actions it may 
employ to monitor and manage its risks, and, as needed, to stabilize 
its financial condition in the event those risks materialize. 
Specifically, the Recovery Plan would provide a roadmap that would 
identify a number of triggers for the potential application of a number 
of available recovery tools. Identifying triggers for the potential 
application of recovery tools would help promote robust risk management 
and reduce systemic risks by better enabling DTC to more promptly 
determine when and how it may need to manage a significant stress 
event, and, as needed, stabilize its financial condition.
    Similarly, the Force Majeure Rule is designed to provide a roadmap 
to address extraordinary events that may occur outside of DTC's 
control. Specifically, the Force Majeure Rule would define a Market 
Disruption Event and provide governance around determining when such an 
event has occurred. The Force Majeure Rule also would describe DTC's 
authority to take actions during the pendency of a Market Disruption 
Event that it deems appropriate to address such an event and facilitate 
the continuation of DTC's services, if practicable. By defining a 
Market Disruption Event and providing such governance and authority, 
the Commission believes that the Force Majeure Rule also would help 
promote robust risk management and reduce systemic risks by improving 
DTC's ability to identify and manage a force majeure event, and, as 
needed, to stabilize its financial condition so that DTC can continue 
to operate and act as a source of stability for the financial markets 
it serves.
    The Commission believes that the Recovery Plan and the Force 
Majeure Rule reflect an approach designed to allow for a more 
considered and comprehensive evaluation by DTC of a stressed market 
situation and the ways in which DTC could apply available recovery 
tools in a manner intended to minimize the potential negative effects 
of the stress situation for DTC, its membership, and the broader 
financial system. Therefore, the Commission believes that the Recovery 
Plan and the Force Majeure Rule would help promote robust risk 
management at DTC and, thus, reduce systemic risks by establishing a 
means for DTC to best determine the most appropriate way to address 
such stress situations in an effective manner.
    The Commission believes that the R&W Plan, generally, would help 
DTC promote safety and soundness and support the stability of the 
broader financial system by providing a roadmap to wind-down that is 
designed to ensure the availability of DTC's critical services to the 
marketplace, while reducing disruption to the operations of 
Participants and financial markets that might be caused by DTC's 
failure. Specifically, as described above, the Wind-down Plan, as 
facilitated by the Wind-down Rule, would provide for the wind-down of 
DTC's business and transfer of membership and critical services if the 
recovery tools do not successfully return DTC to financial viability. 
Accordingly, critical services, such as services that lack alternative 
providers or products as well as services that are interconnected with 
other participants and processes within the U.S. financial system would 
be able to continue in an orderly manner while DTC is seeking to wind-
down its services. By designing the Wind-down Plan and the Wind-down 
Rule to enable the continuity of DTC's critical services and membership 
in an orderly manner while DTC is seeking to wind-down its services, 
the Commission believes these proposed changes would help DTC promote 
safety and soundness and support stability in the broader financial 
system in the event the Wind-down Plan is implemented.
    By better enabling DTC to promote robust risk management, promote 
safety and soundness, reduce systemic risks, and support the stability 
of the broader financial system, as described above, the Commission 
believes that the proposed changes in the Advance Notice are consistent 
with Section 805(b) of the Clearing Supervision Act.\55\
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    \55\ 12 U.S.C. 5464(b).

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[[Page 44392]]

B. Consistency With Rules 17Ad-22(e)(2)(i), (iii), and (v) Under the 
Act

    Rule 17Ad-22(e)(2)(i) under the Act requires a covered clearing 
agency \56\ to establish, implement, maintain, and enforce written 
policies and procedures reasonably designed to provide for governance 
arrangements that are clear and transparent.\57\ Rule 17Ad-
22(e)(2)(iii) under the Act requires a covered clearing agency to 
establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to provide for governance arrangements 
that support the public interest requirements in Section 17A of the Act 
\58\ applicable to clearing agencies, and the objectives of owners and 
participants.\59\ Rule 17Ad-22(e)(2)(v) under the Act requires a 
covered clearing agency to establish, implement, maintain, and enforce 
written policies and procedures reasonably designed to provide for 
governance arrangements that specify clear and direct lines of 
responsibility.\60\
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    \56\ A ``covered clearing agency'' means, among other things, a 
clearing agency registered with the Commission under Section 17A of 
the Exchange Act (15 U.S.C. 78q-1 et seq.) that is designated 
systemically important by the Financial Stability Oversight Counsel 
(``FSOC'') pursuant to the Clearing Supervision Act (12 U.S.C. 5461 
et seq.). See 17 CFR 240.17Ad-22(a)(5)-(6). On July 18, 2012, FSOC 
designated DTC as systemically important. U.S. Department of the 
Treasury, ``FSOC Makes First Designations in Effort to Protect 
Against Future Financial Crises,'' available at https://www.treasury.gov/press-center/press-releases/Pages/tg1645.aspx. 
Therefore, DTC is a covered clearing agency.
    \57\ 17 CFR 240.17Ad-22(e)(2)(i).
    \58\ 15 U.S.C. 78q-1.
    \59\ 17 CFR 240.17Ad-22(e)(2)(iii).
    \60\ 17 CFR 240.17Ad-22(e)(2)(v).
---------------------------------------------------------------------------

    As described above, the R&W Plan is designed to identify clear 
lines of responsibility concerning the R&W Plan including (1) the 
ongoing development of the R&W Plan; (2) ongoing maintenance of the R&W 
Plan; (3) reviews and approval of the R&W Plan; and (4) the functioning 
and implementation of the R&W Plan. As described above, the R&R Team, 
which reports to the Management Committee, is responsible for 
maintaining the R&W Plan and for the development and ongoing 
maintenance of the overall recovery and wind-down planning process. 
Meanwhile, the Board, or such committees as may be delegated authority 
by the Board from time to time pursuant to its charter, would review 
and approve the R&W Plan biennially, and also would review and approve 
any changes that are proposed to the R&W Plan outside of the biennial 
review. Moreover, the R&W Plan would state the stages of escalation 
required to manage recovery under the Recovery Plan or to invoke DTC's 
wind-down under the Wind-down Plan, which would range from relevant 
business line managers up to the Board. The R&W Plan would identify the 
parties responsible for certain activities under both the Recovery Plan 
and the Wind-down Plan, and would describe their respective roles. The 
R&W Plan also would specify the process DTC would take to receive input 
from various parties at DTC, including management committees and the 
Board.
    In considering the above, the Commission believes that the R&W Plan 
would help contribute to establishing, implementing, maintaining, and 
enforcing written policies and procedures reasonably designed to 
provide for governance arrangements that are clear and transparent 
because it would specify lines of control. The Commission also believes 
that the R&W Plan would help contribute to establishing, implementing, 
maintaining, and enforcing written policies and procedures reasonably 
designed to provide for governance arrangements that support the public 
interest requirements in Section 17A of the Act \61\ applicable to 
clearing agencies, and the objectives of owners and participants 
because the R&W Plan specifies the process DTC would take to receive 
input from various DTC stakeholders. In addition, the Commission 
believes that the R&W Plan would help contribute to establishing, 
implementing, maintaining, and enforcing written policies and 
procedures reasonably designed to provide for governance arrangements 
that specify clear and direct lines of responsibility because it 
specifies who is responsible for the ongoing development, maintenance, 
reviews, approval, functioning, and implementation of the R&W Plan.
---------------------------------------------------------------------------

    \61\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

    Therefore, the Commission believes that the R&W Plan is consistent 
with Rules 17Ad-22(e)(2)(i), (iii), and (v) under the Act.\62\
---------------------------------------------------------------------------

    \62\ 17 CFR 240.17Ad-22(e)(2)(i), (iii), and (v).
---------------------------------------------------------------------------

C. Consistency With Rule 17Ad-22(e)(3)(ii) Under the Act

    Rule 17Ad-22(e)(3)(ii) under the Act requires a covered clearing 
agency to establish, implement, maintain, and enforce written policies 
and procedures reasonably designed to maintain a sound risk management 
framework for comprehensively managing legal, credit, liquidity, 
operational, general business, investment, custody, and other risks 
that arise in or are borne by the covered clearing agency, which 
includes plans for the recovery and orderly wind-down of the covered 
clearing agency necessitated by credit losses, liquidity shortfalls, 
losses from general business risk, or any other losses.\63\
---------------------------------------------------------------------------

    \63\ 17 CFR 240.17Ad-22(e)(3)(ii).
---------------------------------------------------------------------------

    As described above, the R&W Plan's Recovery Plan provides a plan 
for DTC's recovery necessitated by credit losses, liquidity shortfalls, 
losses from general business risk, or any other losses by defining the 
risk management activities, stress conditions and indicators, and tools 
that DTC may use to address stress scenarios that could eventually 
prevent DTC from being able to provide its critical services as a going 
concern. More specifically, through the framework of the Crisis 
Continuum, which identifies tools that can be employed to mitigate 
losses and mitigate or minimize liquidity needs as the market 
environment becomes increasingly stressed, the Recovery Plan would 
identify measures that DTC may take to manage risks of credit losses 
and liquidity shortfalls, and other losses that could arise from a 
Participant Default. The Recovery Plan also would address DTC's 
management of general business risks and other non-default risks that 
could lead to losses by identifying potential non-default losses and 
the resources available to DTC to address such losses, including 
recovery triggers and tools to mitigate such losses. Therefore, the 
Commission believes that the R&W Plan's Recovery Plan helps DTC 
establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to maintain a sound risk management 
framework for comprehensively managing legal, credit, liquidity, 
operational, general business, investment, custody, and other risks 
that arise in or are borne by DTC, which includes a recovery plan 
necessitated by credit losses, liquidity shortfalls, losses from 
general business risk, or any other losses.
    As described above, the R&W Plan's Wind-down Plan provides a plan 
for orderly wind-down of DTC, which would be triggered by a 
determination by the Board that recovery efforts have not been, or are 
unlikely to be, successful in returning DTC to viability as a going 
concern. Once triggered, the Wind-down Plan sets forth mechanisms for 
the transfer of DTC's membership and business, and it is designed to 
maintain continued access to DTC's critical services and to minimize 
market impact of the transfer while DTC is seeking to ultimately wind-
down its services. Specifically, the Wind-down Plan would provide for 
the transfer of

[[Page 44393]]

DTC's business, assets, securities inventory, and membership to another 
legal entity with such transfer being effected in connection with 
proceedings under Chapter 11 of the U.S. Bankruptcy Code.\64\ After 
effectuating this transfer, DTC would liquidate any remaining assets in 
an orderly manner in bankruptcy proceedings.
---------------------------------------------------------------------------

    \64\ 11 U.S.C. 101 et seq.
---------------------------------------------------------------------------

    Although the Commission is not opining on the Wind-down Plan's 
consistency with the U.S. Bankruptcy Code, in reviewing the proposed 
changes, the Commission believes that DTC's intent to use bankruptcy 
proceedings to achieve an orderly liquidation of assets after any 
transfer of DTC's business appears reasonable, in light of the 
provisions of the Bankruptcy Code that address the liquidation and 
distribution of a debtor's property among creditors and interest 
holders.\65\ Under many circumstances, Section 363 of the Bankruptcy 
Code provides for the sale of property ``free and clear of any interest 
in such property of an entity other than the estate[.]'' \66\ The 
Commission believes that DTC's analysis regarding the applicability of 
these provisions, while not free from doubt, presents a reasonable 
approach to liquidation in light of the circumstances and the available 
alternatives.\67\ Therefore, the Commission believes that the R&W 
Plan's Wind-down Plan helps DTC establish, implement, maintain, and 
enforce written policies and procedures reasonably designed to maintain 
a sound risk management framework for comprehensively managing legal, 
credit, liquidity, operational, general business, investment, custody, 
and other risks that arise in or are borne by DTC, which includes a 
wind-down plan necessitated by credit losses, liquidity shortfalls, 
losses from general business risk, or any other losses.
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    \65\ See, e.g., 11 U.S.C. 363, 726, and 1129(a)(7).
    \66\ See 11 U.S.C. 363(f).
    \67\ The Wind-down Plan would identify certain factors the Board 
may consider in evaluating alternatives, which would include, for 
example, whether DTC could safely stabilize the business and protect 
its value without seeking bankruptcy protection, and DTC's ability 
to continue to meet its regulatory requirements.
---------------------------------------------------------------------------

    Therefore, the Commission believes that the R&W Plan is consistent 
with Rule 17Ad-22(e)(3)(ii) under the Act.\68\
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    \68\ 17 CFR 240.17Ad-22(e)(3)(ii).
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D. Consistency With Rules 17Ad-22(e)(15)(i)-(ii) Under the Act

    Rule 17Ad-22(e)(15)(i) under the Act requires a covered clearing 
agency to establish, implement, maintain, and enforce written policies 
and procedures reasonably designed to identify, monitor, and manage its 
general business risk and hold sufficient liquid net assets funded by 
equity to cover potential general business losses so that the covered 
clearing agency can continue operations and services as a going concern 
if those losses materialize, including by determining the amount of 
liquid net assets funded by equity based upon its general business risk 
profile and the length of time required to achieve a recovery or 
orderly wind-down, as appropriate, of its critical operations and 
services if such action is taken.\69\ Rule 17Ad-22(e)(15)(ii) under the 
Act requires a covered clearing agency to establish, implement, 
maintain, and enforce written policies and procedures reasonably 
designed to identify, monitor, and manage its general business risk and 
hold sufficient liquid net assets funded by equity to cover potential 
general business losses so that the covered clearing agency can 
continue operations and services as a going concern if those losses 
materialize, including by holding liquid net assets funded by equity 
equal to the greater of either (x) six months of the covered clearing 
agency's current operating expenses, or (y) the amount determined by 
the board of directors to be sufficient to ensure a recovery or orderly 
wind-down of critical operations and services of the covered clearing 
agency, as contemplated by the plans established under Rule 17Ad-
22(e)(3)(ii) under the Act,\70\ discussed above.\71\
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    \69\ 17 CFR 240.17Ad-22(e)(15)(i).
    \70\ 17 CFR 240.17Ad-22(e)(3)(ii).
    \71\ 17 CFR 240.17Ad-22(e)(15)(ii).
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    As discussed above, DTC's Capital Policy is designed to address how 
DTC holds LNA in compliance with these requirements,\72\ while the 
Wind-down Plan would include an analysis to estimate the amount of time 
and cost to achieve a recovery or orderly wind-down of DTC's critical 
operations and services, and would provide that the Board review and 
approve this analysis and estimation annually. The Wind-down Plan also 
would provide that the estimate would be the Recovery/Wind-down Capital 
Requirement under the Capital Policy. Under that policy, the General 
Business Risk Capital Requirement, which is the amount of LNA that DTC 
plans to hold to cover potential general business losses so that it can 
continue operations and services as a going concern if those losses 
materialize, is calculated as the greatest of three estimated amounts, 
one of which is this Recovery/Wind-down Capital Requirement. Therefore, 
the Commission believes that the R&W Plan is consistent with Rules 
17Ad-22(e)(15)(i) and (ii) under the Act.\73\
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    \72\ Supra note 13.
    \73\ 17 CFR 240.17Ad-22(e)(15)(i) and (ii).
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III. Conclusion

    It is therefore noticed, pursuant to Section 806(e)(1)(I) of the 
Clearing Supervision Act,\74\ that the Commission does not object to 
advance notice SR-DTC-2017-803, as modified by Amendment No. 1, and 
that DTC is authorized to implement the proposal as of the date of this 
notice or the date of an order by the Commission approving proposed 
rule change SR-DTC-2017-021, as modified by Amendment No. 1, whichever 
is later.
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    \74\ 12 U.S.C. 5465(e)(1)(I).

    By the Commission.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-18867 Filed 8-29-18; 8:45 am]
 BILLING CODE 8011-01-P