Document ID: SEC-2018-0273-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Depository Trust Co.
Posted Date: 2018-02-14T05:00Z

[Federal Register Volume 83, Number 31 (Wednesday, February 14, 2018)]
[Notices]
[Pages 6624-6626]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-02977]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82662; File No. SR-DTC-2017-024]

Self-Regulatory Organizations; The Depository Trust Company; 
Order Approving Proposed Rule Change To Amend Procedures in the DTC 
Settlement Service Guide Relating to the Intra-Month Collection of 
Required Participants Fund Deposits

February 8, 2018.
    On December 22, 2017, the Depository Trust Corporation (``DTC'') 
filed with the Securities and Exchange Commission (``Commission'') 
proposed rule change SR-DTC-2017-024, pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder.\2\ The proposed rule change was published for comment in 
the Federal Register on January 9, 2018.\3\ The Commission did not 
receive any comment letters on the proposed rule change. For the 
reasons discussed below, the Commission approves 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. 82434 (January 3, 2018), 
83 FR 1046 (January 9, 2018) (SR-DTC-2017-024) (``Notice'').
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I. Description of the Proposed Rule Change

    The proposed rule change would amend DTC's Settlement Service Guide 
(``Guide'') \4\ to (1) codify more completely DTC's current practices 
regarding when a DTC participant (``Participant'') \5\ must deposit 
cash at DTC to satisfy an intra-month deficiency in the Participant's 
required contribution to DTC's Participants Fund \6\ (``Deficiency''), 
and (2) make technical and clarifying changes to the Guide, as more 
fully described below.
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    \4\ Available at https://www.dtcc.com/~/media/Files/Downloads/
legal/service-guides/Settlement.pdf.
    \5\ ``Participant'' is defined in the DTC Rules, Bylaws, 
Organization Certificate (``Rules'') as an entity to which DTC 
offers its services pursuant to the Rules, available at http://www.dtcc.com/legal/rules-and-procedures?pgs=1.
    \6\ The Participants Fund is the fund in which DTC collects and 
holds cash from Participants in order to maintain sufficient 
liquidity resources in the event of a Participant default. Notice, 
83 FR at 1047.
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A. Background

    DTC requires Participants to contribute an aggregate amount of 
$1.15 billion to the Participants Fund.\7\ That amount is collected 
through two components of the Participants Funds, the Core Fund and the 
Liquidity Fund, to which Participants must contribute, as 
applicable.\8\
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    \7\ Guide, supra note 4 at 48; Notice, 83 FR at 1047.
    \8\ See Guide, supra note 4 at 48-50 (explaining the components 
of the Participants Fund); see also Notice, 83 FR at 1047.
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    DTC sets the total value of the Core Fund at $450 million, which is 
collected through two underlying funds: The Base Fund and the 
Incremental Fund.\9\ Each Participant is required to contribute a 
minimum of $7,500 to the Base Fund.\10\ Meanwhile, the Incremental Fund 
makes up the difference, if any, between the aggregate amount collected 
in the Base Fund and the total $450 million of the Core Fund. If there 
is a difference, DTC allocates the difference proportionally among all 
Participants.\11\
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    \9\ See Guide, supra note 4 at 48.
    \10\ Id.; Notice, 83 FR at 1047.
    \11\ Guide, supra note 4 at 48. A Participant's contribution to 
the Incremental Fund is based on the average of the Participant's 
six largest intra-day liquidity exposures at DTC, over a rolling 60-
business-day period. Id.; Notice, 83 FR at 1047.
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    DTC sets the total value of the Liquidity Fund at $700 million.\12\ 
The Liquidity Fund is allocated proportionately among Participants with 
affiliated families,\13\ where the affiliated families have been 
authorized by DTC to have over $2.15 billion in intraday debits.\14\
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    \12\ Guide, supra note 4 at 49.
    \13\ The Rules define an ``affiliated family'' as each 
Participant that controls (or is controlled by another Participant 
that has) direct or indirect ownership of more than 50 percent of 
the voting securities (or voting interests) of another Participant, 
and each such Participant is under the common control of the same 
entity. Supra note 5 at 2.
    \14\ Guide, supra note 4 at 49; Notice, 83 FR at 1047.
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    The aggregate amount that a Participant is required to contribute 
to the Participants Fund is the Participant's Required Participants 
Fund Deposit (hereinafter, ``Required Deposit'').\15\ In addition, 
Participants may make voluntary deposits to the Participants Fund, 
which DTC refers to as Voluntary Participants Fund Deposits 
(hereinafter, ``Voluntary Deposit'').\16\ A Participant may choose to 
make a Voluntary Deposit in anticipation of

[[Page 6625]]

potential increases to its Required Deposit.\17\
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    \15\ Guide, supra note 4 at 47-48; Notice, 83 FR at 1047.
    \16\ Guide, supra note 4 at 47; Notice, 83 FR at 1047.
    \17\ Notice, 83 at 1047. A Participant's Required Deposit may 
fluctuate based on the liquidity exposure associated with the 
Participant's settlement activity. See Guide, supra note 4 at 51. 
The Guide provides that when a Participant's Required Deposit has 
decreased, the Participant may choose to leave excess cash in the 
Participants Fund to reduce the level of administration that would 
otherwise be necessary should the Participant's Required Deposit 
later increase. Id. DTC also accepts Voluntary Deposits for such 
administrative purposes. Id.
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    A Participant's deposits to the Participants Fund, including both 
Required Deposits and Voluntary Deposits, if any, are considered the 
Participant's Actual Participants Fund Deposits (hereinafter, ``Actual 
Deposits'').\18\ DTC can use a Participant's Actual Deposits to cover 
losses associated with the Participant's default.\19\
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    \18\ Notice, 83 FR at 1047.
    \19\ Id.
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    DTC calculates the Required Deposit of each Participant on a daily 
basis.\20\ However, DTC states that Required Deposits generally do not 
materially change on a daily basis because the calculation uses a 60-
business-day rolling average.\21\ Therefore, DTC generally only 
collects funds to cover a Deficiency, if any, on a monthly basis--
specifically, on the last business day of the month.\22\
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    \20\ Id.
    \21\ Id.
    \22\ Id.
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    Notwithstanding the above, DTC will require a Participant to 
satisfy an intra-month Deficiency if, when considering the Reference 
Amount, described below, the Deficiency meets or exceeds either the 
Standard Threshold or the Watch List Threshold, also described below.
    The Reference Amount is the most recent Required Deposit amount 
that the Participant deposited to the Participants Fund, as compared to 
the Required Deposit amount that DTC calculates on a daily basis but 
does not necessarily require an intra-month deposit.\23\ More 
specifically, the Reference Amount is the amount that the Participant 
deposited to the Participants Fund based upon a Required Deposit as 
calculated on (1) the last business day of the prior month, (2) the 
most recent intra-month business day when the Participant's Deficiency 
met or exceeded the Standard Threshold or the Watch List Threshold, as 
described below, or (3) the most recent intra-month business day when 
DTC collected an ``adequate assurance'' charge under Rule 9(A) of the 
Rules.\24\
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    \23\ See Guide, supra note 4 at 50-51 (explaining daily 
calculations of the Required Deposit); see also Notice, 83 FR at 
1048.
    \24\ Notice, 83 FR at 1048. Pursuant to Rule 9(A) of the Rules, 
if DTC is concerned with a Participant's operational or financial 
soundness, DTC may require adequate assurances of financial or 
operational capacity from the Participant. Id.; see also Rules, 
supra note 5, Rule 9(A), Section 2 (stating ``At the request of 
[DTC],'' a Participant ``shall immediately furnish [DTC] with such 
assurances as [DTC] shall require of the financial ability of the 
Participant . . . including deposits to the Participants Fund'').
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    The Standard Threshold for determining when a Participant must 
satisfy an intra-month Deficiency is when (1) the difference between 
the Participant's current Required Deposit calculation and the 
Reference Amount equals or exceeds $500,000 and (2) the difference is 
at least a 25 percent increase over the Reference Amount.\25\
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    \25\ Notice, 83 FR at 1048.
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    The Watch List Threshold for determining when a Participant must 
satisfy an intra-month Deficiency is when (1) the Participant is on 
DTC's ``Watch List'' \26\ and (2) the difference between the 
Participant's current Required Deposit calculation and the Reference 
Amount is at least a 10 percent increase over the Reference Amount.\27\
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    \26\ Notice, 83 FR at 1048. The Watch List is a list of 
Participants with credit risk rating of ``5,'' ``6,'' or ``7,'' as 
calculated by DTC's Credit Risk Rating Matrix, as well as 
Participants that, based on DTC's consideration of relevant factors, 
are deemed by DTC to pose a heightened risk to DTC and its 
Participants. Id. at 1047. These factors include (i) quantitative 
factors, such as capital, assets, earnings, and liquidity, and (ii) 
qualitative factors, such as management quality, market position/
environment, and capital and liquidity risk management. Id.
    \27\ Id. at 1048-49.
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B. Proposed Changes to the Guide

    The Guide currently does not define the Reference Amount used for 
the purpose of determining the Standard Threshold and Watch List 
Threshold, nor does the Guide describe the Watch List Threshold.\28\ As 
such, DTC proposes to codify in the Guide its current processes for (1) 
determining the Reference Amount for each Participant and (2) applying 
the Watch List Threshold, as described above.\29\
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    \28\ Id. at 1047.
    \29\ Id.
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    DTC also proposes to modify the Guide to (1) revise and re-order 
text for enhanced readability and flow of content, (2) add subheadings, 
(3) revise informal references to terms already defined in the Rules to 
use the actual defined terms, and (4) make grammatical corrections.\30\
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    \30\ Id. at 1049.
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II. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \31\ 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. The Commission believes the proposal is 
consistent with Act, specifically Section 17A(b)(3)(F) of the Act and 
Rule 17Ad-22(e)(23)(ii) under the Act.\32\
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    \31\ 15 U.S.C. 78s(b)(2)(C).
    \32\ 15 U.S.C. 78q-1(b)(3)(F); 17 CFR 240.17Ad-22(e)(23)(ii).
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    Section 17A(b)(3)(F) of the Act requires, in part, that the rules 
of the clearing agency be designed to assure the safeguarding of 
securities and funds which are in the custody or control of the 
clearing agency or for which it is responsible.\33\ As described above, 
the proposed rule change would codify DTC's practices regarding the 
Reference Amount and the Watch List Threshold. By adding these 
provisions to the Guide, the Guide would provide greater transparency 
to Participants regarding the criteria DTC uses to determine whether a 
Participant must increase its Required Deposit on an intra-month basis 
because of a Deficiency.
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    \33\ 15 U.S.C. 78q-1(b)(3)(F).
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    By providing Participants with such enhanced transparency, the 
proposal is designed to enable Participants to better anticipate when 
an intra-month deposit may be necessary. This increased foresight would 
help improve the likelihood that Participants are ready and able to 
make the deposit. As such, the proposal would help ensure that the 
Participants Fund is adequately funded and, thus, the appropriate 
amount of Actual Deposits is available to DTC, if it should need to 
manage a Participant default. Therefore, the Commission finds that the 
proposed rule change would help assure the safeguarding of securities 
and funds which are in the custody or control of DTC or for which it is 
responsible, consistent with Section 17A(b)(3)(F) of the Act.\34\
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    \34\ Id.
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    Section 17A(b)(3)(F) of the Act also requires, in part, that the 
rules of the clearing agency be designed to promote the prompt and 
accurate clearance and settlement of securities transactions.\35\ As 
described above, the proposed rule change also includes technical and 
clarifying changes to the text of the Guide that would enhance 
readability, make grammatical corrections, and add new section 
headings. These changes

[[Page 6626]]

would increase the precision and clarity of the Guide. This increased 
precision and clarity would help facilitate Participants' ability to 
better understand their respective rights and obligations regarding 
DTC's clearance and settlement of securities transactions. Accordingly, 
the Commission finds that the proposed changes would promote the prompt 
and accurate clearance and settlement of securities transactions, 
consistent with the requirements of Section 17A(b)(3)(F) of the 
Act.\36\
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    \35\ Id.
    \36\ Id.
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    Rule 17Ad-22(e)(23)(ii) under the Act requires DTC to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to provide sufficient information to enable 
Participants to identify and evaluate the risks and material costs they 
incur by participating in DTC.\37\ As described above, the proposed 
rule change would (1) increase the Guide's transparency regarding DTC's 
procedures for the intra-month calculation of Required Deposits and (2) 
make other technical and clarifying changes to increase the Guide's 
readability. Increased transparency around a Participant's required 
intra-month deposit to the Participants Fund to satisfy a Deficiency, 
as well as the increased clarity in the readability of the Guide, are 
each changes that are designed to provide Participants with sufficient 
information to identify and evaluate risks and material costs in 
connection with their Required Deposit as participants of DTC. 
Therefore, the Commission finds that the proposed rule change is 
consistent with Rule 17Ad-22(e)(23)(ii).\38\
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    \37\ 17 CFR 240.17Ad-22(e)(23)(ii).
    \38\ Id.
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III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act, in particular 
the requirements of Section 17A of the Act \39\ and the rules and 
regulations thereunder.
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    \39\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that proposed rule change SR-DTC-2017-024 be, and hereby is, 
approved.\40\
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    \40\ In approving the proposed rule change, the Commission 
considered the proposals' impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\41\
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    \41\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-02977 Filed 2-13-18; 8:45 am]
 BILLING CODE 8011-01-P