Document ID: SEC-2017-1179-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Depository Trust Co.
Posted Date: 2017-07-13T04:00Z

[Federal Register Volume 82, Number 133 (Thursday, July 13, 2017)]
[Notices]
[Pages 32417-32419]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-14668]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81099; File No. SR-DTC-2017-012]

Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
To Modify the DTC Settlement Service Guide in Order To Enhance the Memo 
Segregation Function in Connection With Deliveries Processed at DTC 
Related to the Direct Registration System

July 7, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 30, 2017, The Depository Trust Company (``DTC'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change as described in Items I, II and III below, which Items have been 
prepared by the clearing agency. DTC filed the proposed rule change 
pursuant to Section 19(b)(3)(A) of the Act \3\ and Rule 19b-4(f)(4) \4\ 
thereunder. The proposed rule change was effective upon filing with the 
Commission. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(4).
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change would revise the DTC Settlement Service 
Guide (``Service Guide'') \5\ to enhance the Memo Segregation function 
(``Memo Seg'') with respect to its use by a Participant \6\ in 
connection with Deliveries processed at DTC for transactions related to 
DRS,\7\ as discussed below.
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    \5\ Available at http://www.dtcc.com/~/media/Files/Downloads/
legal/service-guides/Settlement.pdf. Each term not otherwise defined 
herein has its respective meaning as set forth in the Rules, By-Laws 
and Organization Certificate of DTC (the ``Rules''), available at 
http://www.dtcc.com/legal/rules-and-procedures.aspx, and the Service 
Guide.
    \6\ For the purposes of this proposed rule change, the term 
Participant refers to both Participants and Limited Participants 
that use the Direct Registration System (``DRS''), as discussed 
below. (Pursuant to Rule 2 ``. . . the term ``Participant'' shall 
include the term ``Limited Participant'' unless the (i) context 
otherwise requires or (ii) the Procedures otherwise provide.'' See 
Rule 2, supra note 5.)
    \7\ External to DTC, DRS allows an investor to hold a Security 
as the registered owner in electronic form on the books of a 
transfer agent rather than holding a certificate or holding 
indirectly through a Securities Intermediary (e.g., a broker-
dealer). DRS-related transactions between transfer agents and 
broker-dealers that are both Participants may be processed through 
DTC. (Typically, transfer agents are Limited Participants for 
purposes of processing DRS-related transactions.) See Securities 
Exchange Act Release No. 37931 (November 7, 1996), 61 FR 58600 
(November 15, 1996) (SR-DTC-96-15).
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, the clearing agency included 
statements concerning the purpose of and basis for the proposed rule 
change and discussed any comments it received on the proposed rule 
change. The text of these statements may be examined at the places 
specified in Item IV below. The clearing agency has prepared summaries, 
set forth in sections A, B, and C below, of the most significant 
aspects of such statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

1. Purpose
Background
    Memo Seg allows a Participant to elect to protect a designated 
quantity of Securities in a given CUSIP (``Designated Quantity'') from 
unintended intraday Delivery at DTC.\8\ When a Participant uses Memo 
Seg, if the total quantity of Securities in its account in a given 
CUSIP as a result of processing the Delivery would be equal to, or less 
than, the Designated Quantity, the Securities will not be Delivered, 
unless (a) the Participant elects to reduce the Designated Quantity or 
(b) the Designated Quantity is automatically reduced as a result of the 
Participant executing certain transactions (e.g., withdrawals-by-
transfer, certificate-on-demand withdrawals, and free Deliveries that 
are not identified as stock loan or stock loan returns).\9\ This allows 
for automated processing of Securities, reducing manual entries of a 
Participant to maintain a certain quantity of Securities in an Account.
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    \8\ Participants that are registered broker-dealers use Memo Seg 
as a tool to maintain compliance with their obligations under Rule 
15c3-3 (``Customer Protection Rule''). 17 CFR 240.15c3-3. The 
Customer Protection Rule requires, among other things, that broker-
dealers maintain control of all fully-paid or excess margin 
Securities they hold for the accounts of customers. Compliance with 
those obligations by such broker-dealers is external to DTC. See 
Rule 2, supra note 5.
    \9\ See Service Guide, supra note 5, at 43-45.
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Proposed Rule Change
1. Proposal That Standing Instructions From a Receiving Participant 
Would Automatically Increase the Participant's Designated Quantity for 
Deliveries Associated With DRS Transactions
    By providing standing instructions, a Receiving Participant may 
currently elect to have Deliveries of Securities for certain types of 
transactions automatically increase the Receiving Participant's 
Designated Quantity.\10\ However, Securities transferred through DRS do 
not automatically increase the Receiving Participant's Designated 
Amount. The Regulatory and Clearance

[[Page 32418]]

Committee of the Securities Operations Section of the Securities 
Industry and Financial Markets Association (``SIMFA'') has requested 
that DTC modify Memo Seg so that Deliveries of Securities processed 
through DRS would automatically increase the Receiving Participant's 
Designated Quantity.\11\
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    \10\ Transaction types are designated by the Delivering 
Participant using a reason code provided on a Delivery instruction 
(``Code'') (e.g., stock loan transactions, DRS-related, etc.). The 
Receiving Participant may provide standing instructions regarding 
its Designated Quantity using an indicator (``Indicator''), as 
discussed in the Service Guide. By selecting Indicators numbered 1, 
2, 3 and 6, the Participant provides a standing instruction for its 
Designated Quantity to automatically increase when it is the 
Receiving Participant of a transaction designated with an applicable 
Code. See Service Guide, supra note 5 at 43-45.
    \11\ SIFMA has indicated that making this update to Memo Seg 
would strengthen the ability of Participants to control and protect 
customer fully-paid Securities transferred through DRS.
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    In this regard, pursuant to the proposed rule change, DTC would 
revise the Service Guide to allow a Receiving Participant in a DRS-
related transaction to elect to have its Designated Quantity 
automatically increased when the Delivering Participant uses Codes 390 
or 391.\12\ A Receiving Participant would make this election by 
selecting Indicator 1.
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    \12\ Code 390 indicates a DRS-related Delivery and Code 391 
indicates a DRS-related return of a Delivery.
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2. Proposal To Update Memo Seg To Prevent Automatic Decrease of a 
Participant's Designated Quantity for DRS Reclaims
    Pursuant to the Service Guide, a Free Delivery made by a 
Participant always reduces its Designated Quantity unless an exception 
for a given transaction type is expressly provided for. Pursuant to the 
proposed rule change, the text of the Service Guide would be revised so 
that a ``Reclaim'' of a DRS-related Free Delivery, where the related 
transaction is one that the Receiving Participant does not know 
(``DK'') (performed with Code 396), would not automatically reduce the 
Receiving Participant's Designated Quantity. This change would allow a 
Participant to exercise greater control in managing its Designated 
Quantity.
3. Proposal To Make Technical Changes to the Memo Seg Section of the 
Service Guide
    The proposed rule change would also make technical changes to the 
Memo Seg section of the Service Guide to:
    a. (i) Change references to ``you'' and ``your'' to ``a 
Participant,'' ``the Participant,'' ``Participants'' or ``its,'' as 
applicable and (ii) make grammatical and spacing changes to the text to 
provide enhanced clarity and readability with respect to provisions 
related to Memo Seg; and
    b. Add an annex to the Service Guide containing the descriptions of 
the Codes listed in the ``Non-Optional Memo Segregation Transactions'' 
and the ``Optional Memo Segregation Indicators'' subsections.
Effective Date of Proposed Rule Change
    The proposed rule change would be effective upon filing with the 
Commission.
2. Statutory Basis
    Section 17A(b)(3)(F) \13\ of the Securities Exchange Act of 1934 
(``Act'') requires that the rules of the clearing agency be designed, 
inter alia, to protect investors and the public interest. DTC believes 
the proposed rule change is consistent with this provision because it 
would (i) reduce the risk of unintended Delivery of Securities that are 
the subject of a DRS-related transaction by a Participant that (A) 
elects to use applicable Indicators \14\ or (B) enters a DK-related 
Reclaim in connection with a DRS-related Free Delivery and (ii) make 
other technical and grammatical changes to the text of the Service 
Guide that would provide enhanced clarity and readability with respect 
to provisions related to Memo Seg, as discussed above. Thus, by (i) 
reducing the risk of an unintended Delivery in this regard and (ii) 
making other technical and grammatical changes to the text of the 
Service Guide in order to provide enhanced clarity and readability with 
respect to provisions related to Memo Seg, DTC believes that the 
proposed rule change would help protect investors and the public 
interest, consistent with Section 17(b)(3)(F) of the Act, cited above.
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    \13\ 15 U.S.C. 78q-1(b)(3)(F).
    \14\ DTC makes Memo Seg available as a tool for Participants, 
but does not monitor, and is not responsible for, any Participant's 
compliance with its obligation to protect customer fully-paid 
Securities. With respect to any Securities processed through DTC, 
DTC does not recognize (and is not required by its Rules and 
Procedures or applicable law to recognize) a distinction between 
proprietary and customer Securities.
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    The proposed rule change is also designed to be consistent with 
Rule 17Ad-22(e)(23) of the Act,\15\ which was recently adopted by the 
Commission.\16\ Rule 17Ad-22(e)(23) requires DTC, inter alia, to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to publicly disclose all relevant rules 
and material procedures. The proposed rule change, as described above, 
would update the Service Guide to add descriptions of the Codes 
referenced in the Memo Seg section of the Service Guide, as discussed 
above. As such, DTC believes that the proposed rule change would 
promote disclosure of relevant rules and material procedures relating 
to Participants' use of Memo Seg, in accordance with the requirements 
of Rule 17Ad-22(e)(23), promulgated under the Act, cited above.
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    \15\ 17 CFR 240.17Ad-22(e)(23).
    \16\ The Commission adopted amendments to Rule 17ad-22, 
including the addition of new subsection 17ad-22(e), on September 
28, 2016. See Securities Exchange Act Release No. 78961 (September 
28, 2016), 81 FR 70786 (October 13, 2016) (S7-03-14). DTC is a 
``covered clearing agency'' as defined by new Rule 17ad-22(a)(5) and 
must comply with subsection (e) of Rule 17Ad-22. Id.
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(B) Clearing Agency's Statement on Burden on Competition

    DTC does not believe that the proposed rule change would have any 
impact on competition because the proposed rule change would merely 
enhance the ability of any Receiving Participant to control Securities 
in its Account.

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

    Written comments relating to the proposed rule change have not been 
solicited or received. DTC will notify the Commission of any written 
comments received by DTC. DTC management has discussed its intent to 
implement the proposed change with SIFMA and Participants.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) \17\ of the Act and paragraph (f) of Rule 19b-4 \18\ 
thereunder. At any time within 60 days of the filing of the proposed 
rule change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.
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    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 17 CFR 240.19b-4(f).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-DTC-2017-012 on the subject line.

[[Page 32419]]

Paper Comments

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

All submissions should refer to File Number SR-DTC-2017-012. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549-1090 on official business days between the hours 
of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of DTC and on DTCC's 
Web site (http://dtcc.com/legal/sec-rule-filings.aspx). All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly.
    All submissions should refer to File Number SR-DTC-2017-012 and 
should be submitted on or before August 3, 2017.

    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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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-14668 Filed 7-12-17; 8:45 am]
BILLING CODE 8011-01-P