Document ID: SEC-2020-1898-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Depository Trust Co.
Posted Date: 2020-11-30T05:00Z

[Federal Register Volume 85, Number 230 (Monday, November 30, 2020)]
[Notices]
[Pages 76640-76642]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-26282]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90481; File No. SR-DTC-2020-012]

Self-Regulatory Organizations; The Depository Trust Company; 
Order Approving a Proposed Rule Change To Establish the ClaimConnectTM 
Service and Update the Settlement Service Guide

November 23, 2020.

I. Introduction

    On October 8, 2020, The Depository Trust Company (``DTC'') filed 
with the Securities and Exchange Commission (``Commission''), pursuant 
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') 
\1\ and Rule 19b-4 thereunder,\2\ proposed rule change SR-DTC-2020-012. 
The proposed rule change was published for comment in the Federal 
Register on October 21, 2020.\3\ The Commission did not receive any 
comment letters on the proposed rule change. For the reasons discussed 
below, the Commission is approving the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 90203 (October 15, 
2020), 85 FR 67018 (October 21, 2020) (SR-DTC-2020-012) 
(``Notice'').
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II. Description of the Proposed Rule Change

    The proposed rule change \4\ will (i) adopt a new DTC service guide 
to establish the ClaimConnect service at DTC (``ClaimConnect Service 
Guide''), and (ii) update the existing DTC Settlement Service Guide \5\ 
(``Settlement Guide'') to (A) make conforming changes to the Settlement 
Guide to reflect the ClaimConnect service, and (B) update certain 
address and contact information in the Copyright section of the 
Settlement Guide.
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    \4\ Capitalized terms not defined herein are defined in the 
Rules, By-Laws and Organization Certificate of DTC (``Rules'') 
available at http://www.dtcc.com/~/media/Files/Downloads/legal/
rules/dtc_rules.pdf, or in the hereby proposed ClaimConnect Service 
Guide, included as Exhibit 5 to this proposed rule change filing.
    \5\ Available at http://www.dtcc.com/~/media/Files/Downloads/
legal/service-guides/Settlement.pdf.
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A. Background

    DTC is the central securities depository (``CSD'') for 
substantially all corporate and municipal debt and equity securities 
available for trading in the United States. As a covered clearing 
agency that provides CSD services,\6\ DTC provides a central location 
in which securities may be immobilized, and interests in those 
securities are reflected in accounts maintained for its Participants, 
which are financial institutions such as brokers or banks.
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    \6\ A covered clearing agency is defined as a registered 
clearing agency that provides the services of a central counterparty 
(``CCP'') or CSD. See 17 CFR 240.17Ad-22(a)(5). CSD services means 
services of a clearing agency that is a securities depository as 
described in Section 3(a)(23)(A) of the Exchange Act. See 17 CFR 
240.17Ad-22(a)(3). Specifically, the definition of a clearing agency 
includes, in part, ``any person, such as a securities depository 
that (i) acts as a custodian of securities in connection with a 
system for the central handling of securities whereby all securities 
of a particular class or series of any issuer deposited within the 
system are treated as fungible and may be transferred, loaned, or 
pledged by bookkeeping entry without physical delivery of securities 
certificates, or (ii) otherwise permits or facilitates the 
settlement of securities transactions or the hypothecation or 
lending of securities without physical delivery of securities 
certificates.'' 15 U.S.C. 78c(a)(23)(A).
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    DTC's CSD services include cash claims or cash claim transactions, 
which are cash entitlements (i.e., a request for cash) from one 
Participant to another Participant. Currently, cash claims arise as a 
result of trading exceptions from a Corporate Action event,\7\ where a 
cash entitlement needs to be delivered from one holder to another. 
Today, such claims are settled away from DTC, except for some stock 
loan and repurchase (``repo'') substitution payments, which can be 
settled via DTC's Adjustment Payment Orders (``APOs''). DTC stated that 
it developed the ClaimConnect service so Participants can settle cash 
claims in one centralized location, using the DTC system.\8\
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    \7\ Trading exceptions include, but are not limited to, trades 
outside of the markets' agreed upon settlement cycle, lack of due 
bill fail tracking, stock loan or repo transaction discrepancy, or 
tax treaty differences. See Notice, supra note 3, 85 FR at 67019.
    \8\ See Notice, supra note 3, 85 FR at 67019. Based on 
discussions with its Participants, DTC estimates that ClaimConnect 
may process approximately 212,000 claims its first year, increasing 
to approximately 425,000 claims by its fifth year. See id.
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B. Proposed ClaimConnect Service

    The proposed ClaimConnect service will be an optional service 
available to all DTC Participants.\9\ The service will enable DTC 
Participants to bilaterally match and settle cash claim transactions at 
DTC.\10\
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    \9\ DTC stated that a fee associated with Participants' use of 
the ClaimConnect service will be the subject of a separate, 
subsequent rule filing with the Commission. See Notice, supra note 
3, 85 FR at 67019.
    \10\ To join ClaimConnect, a Participant needs to request to be 
a ``Claim Participant,'' and DTC will then indicate that the 
Participant is now a member of the service (i.e., a User). See 
Notice, supra note 3, 85 FR at 67019.
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    ClaimConnect will be a validation and matching engine that 
continually

[[Page 76641]]

monitors claims throughout their lifecycle in order to settle and close 
claims through DTC's settlement process. This continuous processing 
will allow for both the manual matching of claims (i.e., Affirmation) 
by ClaimConnect users (``Users'') and the systematic matching of two 
like claims by ClaimConnect based on the alignment of certain data 
elements (i.e., Auto-matching).
    ClaimConnect will offer various claim processing functions, 
including end-of-day settlement of cash claims through systematic 
Securities Payment Orders (``SPOs'') generated and submitted by 
ClaimConnect at set times intraday (``settlement time'') on a 
settlement date. If overpaid or underpaid a cash entitlement due to a 
trading exception, a User will be able to create a claim against a 
claim counterparty through ClaimConnect. To create a claim, the 
ClaimConnect system will require the inclusion of certain data 
elements, while other data elements will be optional.\11\
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    \11\ Once submitted, claims can exist in several different 
``states'' depending upon the actions taken by the parties to the 
claim. The applicable rules will describe the different states that 
a claim could take. See Notice, supra note 3, 85 FR at 67019.
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    Validation, the process of confirming claim data elements, will 
happen in two ways, as described below: (i) When a claim is Affirmed, 
as described below, or (ii) when ClaimConnect Auto-matches two claims. 
Users can also modify or Cancel claims. However, not all data elements 
can be modified after submission.
    First, if a counterparty receives a claim and agrees with its 
details (i.e., the data elements), then the counterparty could Affirm 
the claim. Affirming a claim will be a confirmation of the claim's data 
elements and would move the claim into a Matched state. Affirmation 
will usually occur only when one side of a claim is submitted because 
it affords the counterparty enough time to Affirm the claim. Once 
Affirmed, the claim will be settled on the date the parties agree to. 
Second, if both parties to a claim submit their respective sides to the 
claim (i.e., a debit claim and a credit claim), the two sides of the 
claim are Auto-matched.
    The SPO will credit the payee Participant and debit the payor 
Participant the claim amount and will then be incorporated into DTC's 
end-of-day settlement process. ClaimConnect SPOs will be subject to 
DTC's Risk Controls (i.e., Collateral Monitor and Net Debit Cap) and 
will ``recycle'' (i.e., pend) if the SPO cannot satisfy those controls.
    To assist Users with the management of their claims, ClaimConnect 
will offer an Approval feature. The Approval feature will require 
certain actions on a claim to be approved by a separate User employee, 
if the claim amount meets or exceeds a predetermined dollar threshold 
set by the User, before that action can be completed. This feature is 
designed to enable Users to better monitor and manage certain cash 
debits that are leaving their account to satisfy claims. Users can 
activate the Approval feature by updating their ClaimConnect client 
profile. When doing so, the User must then set the dollar threshold 
that will trigger the Approval process.

C. Updates to the DTC Settlement Guide

    DTC has an existing DTC Settlement Guide, which describes its 
existing services related to settlement. DTC will update the existing 
Settlement Guide to (A) make conforming changes to the Settlement Guide 
to reflect the establishment of the ClaimConnect service (specifically, 
to clarify that the RAD process would not apply to cash claims as they 
would go through ClaimConnect), and (B) update certain address and 
contact information in the Copyright section of the Settlement Guide.

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \12\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Act and rules and regulations thereunder applicable 
to such organization. After carefully considering the proposed rule 
change, the Commission finds that the proposed rule change is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to DTC. In particular, the Commission 
finds that the proposed rule change is consistent with Section 
17A(b)(3)(F) of the Act,\13\ for the reasons described below.
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    \12\ 15 U.S.C. 78s(b)(2)(C).
    \13\ 15 U.S.C. 78q-1(b)(3)(F).
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A. Consistency With Section 17A(b)(3)(F)

    Section 17A(b)(3)(F) of the Act requires, in part, that the rules 
of a clearing agency, such as DTC, be designed to promote the prompt 
and accurate clearance and settlement of securities transactions, and 
foster cooperation and coordination with persons engaged in the 
clearance and settlement of securities transactions.\14\ The Commission 
believes that the Proposed Rule Change is consistent with Section 
17A(b)(3)(F) of the Act.\15\
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    \14\ Id.
    \15\ Id.
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    First, DTC proposes to introduce a new ClaimConnect service. As 
noted above, the ClaimConnect service will be an optional service, and 
DTC stated that it developed the service based on discussions with 
Participants. ClaimConnect would enable Participants to bilaterally 
match and settle cash claim transactions at DTC. While settlement of 
cash claims occurs today, it does so away from DTC, in a dispersed 
fashion. ClaimConnect would establish a centralized and coordinated 
location for Participants to settle such claims. By offering a 
centralized and coordinated location for Participants to settle cash 
claims, with various functionality available, the Commission believes 
that the ClaimConnect service is designed to foster cooperation and 
coordination with persons engaged in the clearance and settlement of 
securities transactions.
    Second, DTC will update the existing Settlement Guide to (A) make 
conforming changes to the Settlement Guide to reflect the ClaimConnect 
service, and (B) update certain address and contact information in the 
Copyright section of the Settlement Guide. By making conforming changes 
and updating the Settlement Guide with more current information about 
where Participants and others may direct inquiries about the DTC 
service guides, the Settlement Guide will provide the most up-to-date 
information and should help Participants to submit questions or 
comments about the service guides. Accordingly, the Commission believes 
that the updates to the Settlement Guide are designed to promote the 
prompt and accurate clearance and settlement of securities 
transactions.

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act 
and, in particular, with the requirements of Section 17A of the Act 
\16\ and the rules and regulations promulgated thereunder.
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    \16\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\17\ that proposed rule change SR-DTC-2020-012, be, and hereby is, 
approved.\18\
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    \17\ 15 U.S.C. 78s(b)(2).
    \18\ In approving the proposed rule change, the Commission 
considered the proposals' impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

[[Page 76642]]

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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-26282 Filed 11-27-20; 8:45 am]
BILLING CODE 8011-01-P