Document ID: SEC-2020-1669-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Depository Trust Co.
Posted Date: 2020-10-20T04:00Z

[Federal Register Volume 85, Number 203 (Tuesday, October 20, 2020)]
[Notices]
[Pages 66666-66672]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-23143]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90169; File No. SR-DTC-2020-801]

Self-Regulatory Organizations; the Depository Trust Company; 
Notice of Filing of an Advance Notice To Amend Rule 4

October 14, 2020.
    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\ notice is hereby given that on 
September 9, 2020, The Depository Trust Company (``DTC'') filed with 
the Securities and Exchange Commission (``Commission'') advance notice 
SR-DTC-2020-801 (``Advance Notice'') as described in Items I, II, and 
III below, which Items have been prepared by the clearing agency.\3\ 
The Commission is publishing this notice to solicit comments on the 
Advance Notice from interested persons.
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    \1\ 12 U.S.C. 5465(e)(1).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ On September 9, 2020, DTC filed the Advance Notice as a 
proposed rule change (SR-DTC-2020-011) with the Commission pursuant 
to Section 19(b)(1) of the Act, 15 U.S.C. 78s(b)(1), and Rule 19b-4 
thereunder, 17 CFR 240.19b-4. A copy of the proposed rule change is 
available at http://www.dtcc.com/legal/sec-rule-filings.aspx.
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I. Clearing Agency's Statement of the Terms of Substance of the Advance 
Notice

    This Advance Notice consists of amendments to the Rules, By-Laws 
and Organization Certificate of DTC (``Rules'').\4\ The proposed change 
would amend Rule 4 to provide expressly that the Participants Fund 
continues to be a liquidity resource that may be used by DTC to fund a 
settlement funding gap to complete settlement on a Business Day, 
whether the funding gap is the result of a Participant Default or 
otherwise. In addition, the proposed change would make other technical 
and clarifying amendments to Rule 4 to provide enhanced transparency 
with respect to use of the Participants Fund and other resources to 
complete settlement on a Business Day, as discussed below.
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    \4\ Each capitalized term not otherwise defined herein has its 
respective meaning as set forth in DTC's rules, including, but not 
limited to, the Rules and the DTC Settlement Service Guide (the 
``Settlement Guide''), available at http://www.dtcc.com/legal/rules-and-procedures.aspx. The Settlement Guide is a Procedure of DTC 
filed with the Commission that, among other things, operationalizes 
and supplements the DTC Rules that relate to settlement, including, 
but not limited to, Rule 4 (Participants Fund and Participants 
Investment).
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Advance Notice

    In its filing with the Commission, the clearing agency included 
statements concerning the purpose of and basis for the Advance Notice 
and discussed any comments it received on the Advance Notice. 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 and B below, of the most significant aspects of such 
statements.

(A) Clearing Agency's Statement on Comments on the Advance Notice 
Received From Members, Participants, or Others

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

[[Page 66667]]

(B) Advance Notice Filed Pursuant to Section 806(e) of the Clearing 
Supervision Act

Description of Proposed Change
    The proposed rule change would amend Rule 4 to provide expressly 
that the Participants Fund continues to be a liquidity resource that 
may be used by DTC to fund a settlement funding gap to complete 
settlement on a Business Day, whether the funding gap is the result of 
a Participant Default or otherwise. In addition, the proposed rule 
change would make other technical and clarifying amendments to Rule 4 
to provide enhanced transparency with respect to use of the 
Participants Fund and other resources to complete settlement on a 
Business Day, as discussed below.
(i) Background
A. DTC Settlement on a Business Day
    DTC is the central securities depository (``CSD'') for 
substantially all corporate and municipal debt and equity securities 
available for trading in the United States. DTC plays a critical role 
in the national financial infrastructure.\5\ As a CSD, 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.\6\ As a CSD, DTC is structured to provide for the settlement of 
book-entry transfers and pledges of interests in securities between 
Participants, and for end-of-day net funds settlement on each Business 
Day.\7\
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    \5\ See Financial Stability Oversight Council (``FSOC'') 2012 
Annual Report, Appendix A at 166, available at https://www.treasury.gov/initiatives/fsoc/Documents/2012%20Appendix%20A%20Designation%20of%20Systemically%20Important%20Market%20Utilities.pdf.
    \6\ See, e.g., Securities Exchange Act Release No. 20221 
(September 23, 1983), 48 FR 45167, 45168 (October 3, 1983) (File No. 
600-1) (``A securities depository is a ``custodial'' clearing agency 
that operates a centralized system for the handling of securities 
certificates. Depositories accept deposits of securities from 
broker-dealers, banks, and other financial institutions; credit 
those securities to the depositing participants accounts; and, 
pursuant to participant's instructions, effect book-entry movements 
of securities. The physical securities deposited with a depository 
are held in a fungible bulk; each participant or pledgee having an 
interest in securities of a given issue credited to its account has 
a pro rata interest in the physical securities of the issue held in 
custody by the securities depository in its nominee name. 
Depositories collect and pay dividends and interest to participants 
for securities held on deposit. Depositories also provide facilities 
for payment by participants to other participants in connection with 
book-entry deliveries of securities . . . .'').
    \7\ See, e.g., Rule 9(A) (Transactions in Securities and Money 
Payments), Rule 9(B) (Transactions in Eligible Securities), Rule 
9(C) (Transactions in MMI Securities), Rule 9(D) (Settling Banks), 
and Rule 9(E) (Clearing Agency Agreements), supra note 4, which 
provide the mechanism to achieve a ``DVP Model 2 Deferred Net 
Settlement System'' (as defined in Annex D of the Principles for 
Financial Market Infrastructures issued by the Committee on Payment 
and Settlement Systems and the Technical Committee of the 
International Organization of Securities Commissions (April 2012), 
available at https://www.bis.org/cpmi/publ/d101a.pdf).
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    The DTC settlement system records money debits and credits to 
Participant settlement accounts throughout a Business Day. Credits to a 
Participant settlement account arise from deliveries versus payment, 
receipt of payment orders, principal and interest distributions in 
respect of securities held, intraday settlement progress payments and 
any other items or transactions that give rise to a credit. Debits to a 
Participant settlement account are primarily due to receives versus 
payment, as well as other types of charges to the account permitted 
under the Rules. As these debits and credits to a Participant's 
settlement account are recorded intraday, the Participant's settlement 
account will be in a net debit balance or net credit balance from time 
to time and, finally, at the end of a Business Day, a net debit, net 
credit or zero balance is determined. This final net debit or net 
credit balance determines whether the Participant has an obligation to 
pay or to be paid in the process of DTC completing settlement on that 
Business Day. A Participant with an end-of-day net debit balance has an 
obligation to pay DTC that amount; a Participant with an end-of-day net 
credit balance is entitled to receive a payment from DTC. When a 
Participant has an end-of-day zero net balance or an end-of-day net 
credit balance, it is deemed to have satisfied its settlement 
obligations for that Business Day, and securities processed for 
delivery versus payment for delivery to the Participant will be 
credited to its account. When a Participant with a net debit balance 
pays its settlement obligation, and DTC completes system-wide 
settlement, all securities processed for delivery versus payment to 
that Participant on that Business Day will be credited to its account 
and it will have paid for those deliveries. As to payments due to the 
Participant for its deliveries on that Business Day, the Participant 
will have been paid as well, because credits for those deliveries 
intraday have offset and reduced its other debit obligations, even 
though, on balance, it finished the Business Day with a settlement 
obligation. A Participant that defaults on its settlement obligations 
on a Business Day will not have paid for the securities processed for 
delivery versus payment, and the securities will not be credited to its 
account.
B. Settlement Gap on a Business Day
    There may be circumstances in which the amount of settlement 
payments received or available to DTC on a Business Day is not 
sufficient to pay all Participants with an end-of-day net credit 
balance on that Business Day (a ``settlement gap''). A settlement gap 
could occur on a Business Day as a result of, principally, a 
Participant Default, where a Participant fails to pay its settlement 
obligation (a ``default gap''). A settlement gap could also occur on a 
Business Day as a result of causes other than a Participant Default (a 
``non-default gap''). For example, a non-default gap could occur if the 
funds required to complete settlement are not available to DTC, in 
whole or in part, due to an operational or data issue arising at DTC, a 
Participant or Settling Bank, or due to a cyber incident, or other 
technological business disruption.
    The Rules and Procedures of DTC specify the extent of the 
obligation of DTC to achieve settlement on each Business Day, and, as 
DTC is not a central counterparty (``CCP''), do not guarantee 
settlement.\8\ However, as a critical part of the national financial 
infrastructure, if DTC does not complete settlement on a given Business 
Day, there could be significant market-wide effects.\9\ The Rules and 
Procedures of DTC are structured so that if there is a settlement gap 
on a Business Day, DTC has liquidity resources to mitigate the risks 
relating to a disruption to obligations settling at DTC on that 
Business Day. If there is any problem with the receipt or disbursement 
of funds for settlement, the issue would need to be addressed quickly. 
Access to liquidity resources needs to be optimized during the tight 
timeframe in which settlement must be completed on a Business Day, in 
order for DTC to quickly and effectively respond to and resolve any 
settlement gap, whether a default gap or non-default gap.
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    \8\ See, e.g., Rule 9(B), supra note 4 (``Each Participant and 
the Corporation shall settle the balance of the Settlement Account 
of the Participant on a daily basis in accordance with these Rules 
and the Procedures. Except as provided in the Procedures, the 
Corporation shall not be obligated to make any settlement payments 
to any Participants until the Corporation has received all of the 
settlement payments that Settling Banks and Participants are 
required to make to the Corporation.'').
    \9\ Supra note 5.

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[[Page 66668]]

C. Participants Fund as a Liquidity Resource To Complete Settlement on 
a Business Day
    The Participants Fund is designed to be one of the foundational 
liquidity resources available to DTC to fund a settlement gap to 
complete settlement on a Business Day. Rule 4 contains the key 
provisions of the Rules and Procedures specifying the rights, duties 
and obligations of Participants and DTC with respect to the 
Participants Fund. Every Participant is required to make at least a 
minimum deposit to the Participants Fund, and Participants with higher 
levels of activity that impose greater liquidity risk to the DTC 
settlement system have proportionally larger required deposits. The 
principal purpose of the Participants Fund is, and historically has 
been, to provide a mutualized liquidity resource to satisfy DTC losses 
and liabilities attributable to its business conducted for the benefit 
of its Participants.\10\ Key among these is daily settlement on each 
Business Day, but also, historically, the Participants Fund was a 
resource to cover losses and other liabilities as well.\11\ Prior to 
August 28, 2018, Rule 4 (``Previous Rule 4''), in particular Section 4 
of Previous Rule 4, provided a unified set of provisions that addressed 
this application of the Participants Fund ``in satisfaction of losses 
and liabilities of the Corporation incident to the business of DTC.''
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    \10\ See Settlement Guide at 48, supra note 4 (``The 
Participants Fund . . . provided in DTC Rule 4 create[s] liquidity 
and collateral resources to support the business of DTC and to cover 
losses and liabilities incident to that business.''). The term 
``business'' with respect to DTC means ``the doing of all things in 
connection with or relating to the Corporation's performance of the 
services specified in the first and second paragraphs of Rule 6 or 
the cessation of such services.'' Rule 4, Section 1(f), supra note 
4. The first two paragraphs of Rule 6 describe services provided by 
DTC, including settlement. Rule 6, supra note 4. DTC notes that, as 
early as 1975, the Rules provided that ``[t]he Participants Fund may 
be used by the Corporation for the purposes of its business . . . 
.'' See DTC CA-1 Application for Permanent Registration as a 
Clearing Agency, dated December 15, 1980 (File 600-1) at page 588. 
In addition, the range of permissible uses of a clearing or 
participants fund as covering ``all losses and liabilities incident 
to clearance and settlement activities'' of the clearing agency was 
specifically noted in the 1983 order of the Commission granting DTC 
full registration as a clearing agency. Securities Exchange Act 
Release No. 20221 (September 23, 1983), 48 FR 45167 (October 3, 
1983) (File No. 600-1). The concept was also in Rule 4 of Central 
Certificate Service, Inc., the predecessor of DTC, filed with the 
Commission in 1972. Securities Exchange Act Release No. 9849 
(November 8, 1972), 37 FR 24795 (November 21, 1972) (As described by 
the Commission: ``Rule 4. A participant's fund will require deposits 
by participants upon the basis of a formula established by CCS, 
Inc., based upon usage. The minimum contribution is $10,000. The 
fund is available for the uses specified in the rules including for 
the purposes of its business.'').
    \11\ See id.
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    On August 28, 2018, the Commission approved a rule change filed by 
DTC with respect to Rule 4 (``Loss Allocation Rule Change'').\12\ A 
primary purpose of the Loss Allocation Rule Change was to harmonize the 
loss allocation provisions of the Rules of DTC with similar provisions 
of the rules of its two affiliated CCPs, National Securities Clearing 
Corporation (``NSCC'') and Fixed Income Clearing Corporation (``FICC'') 
(collectively, the ``CCPs'').
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    \12\ See Securities Exchange Act Release No. 83969 (August 28, 
2018), 83 FR 44955 (September 4, 2018) (SR-DTC-2017-022).
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    As part of the Loss Allocation Rule Change, Previous Rule 4 was 
restructured to provide separate and distinct provisions for (i) in 
Section 4 of Rule 4, the application of liquidity resources, including, 
but not limited to, the pro rata application of the Participants Fund, 
in order to complete settlement on a given Business Day when there is a 
settlement gap, and (ii) in Section 5 of Rule 4, the allocation of 
losses and liabilities of DTC arising out of Default Loss Events or 
Declared Non-Default Loss Events.\13\ Revised Section 4 of Rule 4 was 
meant to retain the core principle of Previous Rule 4 for the 
application of the Participants Fund as a liquidity resource to 
complete settlement.\14\ A new Section 5, consisting of loss allocation 
provisions that were revised for substantial conformity with revisions 
for the CCPs, was inserted into Rule 4 to provide a discrete loss 
allocation waterfall (``Loss Allocation Waterfall'') more comparable to 
NSCC and FICC.
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    \13\ As a result, the main sections of Rule 4 relating to the 
Participants Fund are: Section 1, which focuses on Required 
Participants Fund Deposits and Actual Participants Fund Deposits, 
and briefly addresses the maintenance, permitted use and investment 
of the Participants Fund; Section 3, which provides for the 
application of a defaulting Participant's own Actual Participants 
Fund Deposit to its unpaid settlement obligations; and Section 4, 
which provides for, in relevant part, the pro rata application of 
the Actual Participants Fund Deposits of all Participants (except a 
defaulting Participant) to fund a settlement gap on a Business Day. 
DTC notes that Section 5 of Rule 4 does not provide for the direct 
application of the Participants Fund as part of the Loss Allocation 
Waterfall. The reference in Section 1(f) of Rule 4 to the use of the 
Actual Participants Fund Deposits ``to satisfy losses and 
liabilities of the Corporation incident to the business of the 
Corporation, as provided in Section 5 of this Rule'' refers to the 
application of the Actual Participants Fund Deposit of a Participant 
that fails to timely make its loss allocation payment under the Loss 
Allocation Waterfall, as provided for in Section 3 of Rule 4. 
Accordingly, this proposed rule change has no relationship to or 
effect on the Loss Allocation Waterfall. Nor do the proposed 
drafting changes to Section 4 of Rule 4 affect, in any degree, the 
likelihood of the occurrence of a Default Loss Event or Declared 
Non-Default Loss Event subject to Section 5.
    \14\ See infra note 16.
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    Nevertheless, as explained in more detail below, DTC now recognizes 
that certain of the provisions of amended Section 4 of Rule 4 might be 
read in a manner that conflicts with the stated, and historical, 
purpose of the Participants Fund.\15\ Specifically, certain provisions 
might be construed to narrow the scope of use of the Participants Fund 
for settlement to a default gap only.\16\ Therefore, because settlement 
is a critical service of DTC, and the Participants Fund is a critical 
liquidity resource to fund any settlement gap, DTC is proposing to 
amend certain provisions of Section 4 of Rule 4 to reflect expressly 
that the Participants Fund continues to be a liquidity resource that 
may be used by DTC to fund a settlement gap to complete settlement on a 
Business Day, whether the settlement gap is the result of a Participant 
Default, or otherwise.
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    \15\ See supra note 10.
    \16\ The rule filing for the Loss Allocation Rule Change did not 
mention any intention to narrow the scope of the permitted use of 
the Participants Fund under Rule 4. See Securities Exchange Act 
Release No. 83629 (July 13, 2018), 83 FR 34246, 34248 (July 19, 
2018) (SR-DTC-2017-022) (``The proposed rule change would retain the 
core principles of [Previous] Rule 4 for both application of the 
Participants Fund as a liquidity resource to complete settlement and 
for loss allocation.'').
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(ii) Overview of Proposed Rule Change
A. Sections 3 and 4 of Rule 4
    Currently, Sections 3 and 4 are the primary sections of Rule 4 that 
are relevant to the application of the Participants Fund to fund a 
settlement gap.
    Section 3 of Rule 4 provides, in relevant part, that ``[i]f a 
Participant is a Participant that is a Defaulting Participant pursuant 
to Rule 9(B) or is otherwise obligated to the Corporation pursuant to 
these Rules and the Procedures and fails to satisfy any such obligation 
(a ``Participant Default'') . . . the Corporation shall, to the extent 
necessary to eliminate such obligation, apply some or all of the Actual 
Participants Fund Deposit of such Participant to such obligation to 
satisfy the Participant Default.'' \17\
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    \17\ Supra note 4.
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    Section 3 of Rule 4 is the basic provision of remedies if a 
Participant fails to satisfy an obligation to DTC.\18\ In that case, 
DTC may apply the Actual Participants Fund Deposit of the responsible 
Participant to the extent necessary to satisfy its Participant Default. 
A Participant Default includes a situation where a Participant fails to

[[Page 66669]]

pay its net debit balance at the end of a Business Day. If the amount 
of the Actual Participants Fund Deposit of the responsible Participant 
is insufficient to satisfy its net debit balance, DTC has recourse to 
the Actual Participants Fund Deposits of the other Participants, to be 
charged pro rata in accordance with Section 4 of Rule 4.
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    \18\ Therefore, Section 3 of Rule 4 does not apply to a 
situation where there is no Participant Default.
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    Section 4 of Rule 4 currently provides:

    The Participants Fund shall constitute a liquidity resource 
which may be applied by the Corporation in such amounts as the 
Corporation shall determine, in its sole discretion, to fund 
settlement if there is a Defaulting Participant and the amount 
charged to the Actual Participants Fund Deposit of the Defaulting 
Participant pursuant to Section 3 of this Rule is not sufficient to 
complete settlement. In that case, the Corporation may apply the 
Actual Participants Fund Deposits of Participants other than the 
Defaulting Participant (each, a ``non-defaulting Participant'') as 
provided in this Section and/or apply such other liquidity resources 
as may be available to the Corporation from time to time, including 
the End-of-Day Credit Facility.
    If the Participants Fund is applied to complete settlement, the 
Corporation shall promptly after the event notify each Participant 
and the SEC of the amount applied and the reasons therefor 
(``Settlement Charge Notice''). Each non-defaulting Participant's 
pro rata share of such application of the Participants Fund (each, a 
``pro rata settlement charge'') shall be equal to (i) its Required 
Participants Fund Deposit, as such Required Participants Fund 
Deposit was fixed on the Business Day of such application less its 
Additional Participants Fund Deposit, if any, on that day, divided 
by (ii) the sum of the Required Participants Fund Deposits of all 
non-defaulting Participants, as such Required Participants Fund 
Deposits were fixed on that day, less the sum of the Additional 
Participants Fund Deposits, if any, of such non-defaulting 
Participants on that day.\19\
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    \19\ Supra note 4. The proposed rule change would not affect the 
balance of Section 4 of Rule 4. Section 4 of Rule 4 also provides, 
in part, that a Participant shall have a period of five Business 
Days following issuance of a Settlement Charge Notice to notify DTC 
of its election to terminate its business with DTC and thereby cap 
its maximum obligation with respect to other pro rata settlement 
charges (``Settlement Charge Cap''). If the Participant gives such 
notice, Section 4 of Rule 4 provides that DTC may still retain the 
entire amount of the Actual Participants Fund Deposit of a 
Participant subject to a pro rata settlement charge, up to the 
amount of the Participant's Settlement Charge Cap. Section 4 of Rule 
4 also provides that if the Actual Participants Fund Deposit of a 
Participant is applied pursuant to Section 4 of Rule 4, and, as a 
result, the Actual Participants Fund Deposit of such Participant is 
less than its Required Participants Fund Deposit, the Participant 
must, upon the demand of DTC and within such time as DTC may 
require, deposit to the Participants Fund the amount in cash needed 
to eliminate any resulting deficiency in its Required Participants 
Fund Deposit.

    The above provisions of Section 4 of Rule 4 were drafted as part of 
the restructuring and revision of Rule 4 in connection to the Loss 
Allocation Rule Change. The intention was that these new provisions 
would track the historical principle of Section 4 of Previous Rule 4 
that the Participants Fund may be applied to a loss or liability, 
including a settlement gap, that could not be satisfied by charging the 
Actual Participants Fund Deposit of a Participant pursuant to Section 3 
of Rule 4. Nevertheless, because Section 4 of Rule 4 is now silent as 
to the use of the Participants Fund to complete settlement when there 
is a non-default gap, it could be construed as limiting the pro rata 
application of the Participants Fund to fund a settlement gap to 
default scenarios.
    On each Business Day, settlement occurs during a tight timeframe, 
in conjunction with the Federal Reserve's National Settlement Service 
(NSS) and Fedwire.\20\ If there is any problem with the receipt or 
disbursement of funds for settlement, it would need to be addressed 
quickly. The Participants Fund is designed as ready ``cash on hand'' 
for settlement and is, typically, the most available liquidity resource 
for settlement. If the scope of the permitted use of the Participants 
Fund to fund a settlement gap on a Business Day is not expressly stated 
in Rule 4, there is a possibility that DTC's ability on a Business Day 
to quickly and effectively respond to and resolve any settlement gap 
could be adversely affected. Use of the Participants Fund needs to be 
optimized during the tight timeframe because extensive settlement 
delays might cause significant market disruptive effects. The proposed 
rule change is designed to confirm, expressly, ready access to the 
Participants Fund for settlement purposes, whatever the settlement gap 
scenario.
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    \20\ See Settlement Guide at 19-20, supra note 4.
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    In light of the foregoing, in order to facilitate timely action by 
DTC in connection with any settlement gap, DTC is proposing to amend 
Section 4 of Rule 4 to provide expressly for the use of the 
Participants Fund to fund settlement irrespective of whether the 
settlement gap is a default gap or a non-default gap.
B. Technical and Clarifying Changes
    DTC believes that certain other amendments that were made pursuant 
to the Loss Allocation Rule Change may have impacted the transparency 
of Section 4 of Rule 4 with respect to use of the Participants Fund and 
other resources for settlement. Therefore, as described below, DTC is 
proposing to (i) clarify that a Participant's pro rata share of an 
application of the Participants Fund would be the same whether there is 
a default gap or a non-default gap, (ii) restore the express provision 
for the optional use of a discretionary amount of existing retained 
earnings of DTC to fund settlement, (iii) specifically state that DTC 
may apply its available resources to fund settlement, in such order and 
in such amounts as it determines, in its sole discretion, and (iv) make 
ministerial changes for conformity and readability.
(ii) Proposed Rule Change
A. Section 4 of Rule 4
    Section 4 of Rule 4, Heading:
    In order to reflect that Section 4 of Rule 4 would address the 
liquidity resources to fund settlement, including the application of 
the Participants Fund to fund settlement when there is a default gap or 
a non-default gap, DTC is proposing to replace the current heading of 
Section 4 of Rule 4 ``Application of Participants Fund Deposits of Non-
Defaulting Participants'' with ``Liquidity Resources to Fund 
Settlement; Application of Participants Fund.''
    Section 4 of Rule 4 (Proposed New First Paragraph):
    DTC is proposing to add a new opening paragraph to Section 4 of 
Rule 4 that would reflect and summarize the purpose of the proposed 
Section 4 of Rule 4. Specifically, DTC is proposing to add the 
following paragraph: ``This Section sets forth liquidity resources 
available to the Corporation to fund settlement on a Business Day, in 
the event of a Participant Default or otherwise.''
    Section 4 of Rule 4, First Paragraph (Proposed Second Paragraph):
    DTC is proposing to:
    1. Streamline the language referring to a settlement gap resulting 
from an unsatisfied Participant Default \21\ by revising the text to 
state that, ``If, on a Business Day, there is a Participant Default 
which is not satisfied pursuant to Section 3 of this Rule by the 
application of the Actual Participants Fund Deposit of a Participant, . 
. .'';
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    \21\ The current default gap language is ``if there is a 
Defaulting Participant and the amount charged to the Actual 
Participants Fund Deposit of the Defaulting Participant pursuant to 
Section 3 of this Rule is not sufficient to complete settlement.''
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    2. Expressly address a non-default gap by adding the phrase ``. . . 
or if Section 3 is not applicable, . . .'' into the description of the 
circumstances in

[[Page 66670]]

which DTC may apply the Participants Fund to fund settlement; \22\
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    \22\ Section 3 of Rule 4 applies when there is a Participant 
Default. If there is no Participant Default, Section 3 of Rule 4 
does not apply. Therefore, if there is a settlement gap where 
Section 3 of Rule 4 is inapplicable, such settlement gap could be 
considered a non-default gap.
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    3. Revise the language that refers to DTC's sole discretion to 
apply its liquidity resources, including Participants Fund, to fund 
settlement,\23\ to state, ``. . . in such order and in such amounts as 
the Corporation shall determine, in its sole discretion, to the extent 
necessary to fund settlement on the Business Day:''; and
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    \23\ Rule 4 currently states: ``The Participants Fund shall 
constitute a liquidity resource which may be applied by the 
Corporation in such amounts as the Corporation shall determine, in 
its sole discretion, to fund settlement . . . and/or apply such 
other liquidity resources as may be available to the Corporation 
from time to time, including the End-of-Day Credit Facility.''
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    4. Enhance the transparency of Section 4 of Rule 4 with respect to 
liquidity resources that may be available to DTC to fund settlement by 
amending Section 4 of Rule 4 to provide DTC may apply:

    (a) The Actual Participants Fund Deposits of all Participants 
(other than a Participant whose Actual Participants Fund Deposit is 
exhausted pursuant to Section 3);
    (b) the existing retained earnings or undivided profits of DTC; 
or
    (c) any other liquidity resources as may be available to DTC 
from time to time, including, but not limited to, the End-of-Day 
Credit Facility.

    Specifically, with respect to (a), DTC is proposing to replace the 
reference in the first paragraph of Section 4 of Rule 4 to ``non-
defaulting Participants'' with ``all Participants (other than a 
Participant whose Actual Participants Fund Deposit is exhausted 
pursuant to Section 3).'' The purpose of this change is to provide 
expressly that (i) in the case of a non-default gap, all Participants 
would be charged a pro rata share of the application of the 
Participants Fund, and (ii) a Participant that cured its Participant 
Default pursuant to Section 3 by the application of some, but not all, 
of its Actual Participants Fund Deposit on that Business Day, would 
still be subject to a pro rata share of the application of the 
Participants Fund to fund settlement, up to the remaining balance of 
its Actual Participants Fund Deposit, if there is (x) a default gap 
(due to the default of another Participant) or (y) a non-default gap.
    With respect to (b), in order to enhance the transparency of 
available resources to fund settlement, DTC is proposing to restore the 
express provision for the optional use of a discretionary amount of 
existing retained earnings of DTC \24\ that had appeared in previous 
versions of Rule 4, including Section 4 of Previous Rule 4.\25\ With 
respect to (c), DTC is proposing to insert the phrase ``but not limited 
to,'' after ``including,'' in order to make clear that DTC may have 
other liquidity resources available in addition to the End-of-Day 
Credit Facility.
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    \24\ The retained earnings of DTC are reflected in its quarterly 
condensed consolidated financial statements and annual financial 
statements, available at https://www.dtcc.com/legal/financial-statements.
    \25\ As noted above, the loss allocation provisions of Rule 4 
are not relevant to the application of liquidity resources to a 
settlement gap on a given Business Day. As such, the optional use of 
the existing retained earnings of DTC to fund settlement is separate 
and distinct from calculation of, or application of, the Corporate 
Contribution required in Section 5 of Rule 4.
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    In sum, pursuant to the above proposed changes, the revised 
paragraph would state:

    If, on a Business Day, there is a Participant Default which is 
not satisfied pursuant to Section 3 of this Rule by the application 
of the Actual Participants Fund Deposit of a Participant, or if 
Section 3 is not applicable, then the Corporation shall apply, in 
such order and in such amounts as the Corporation shall determine, 
in its sole discretion, to the extent necessary to fund settlement 
on the Business Day:
    (a) The Actual Participants Fund Deposits of all Participants 
(other than a Participant whose Actual Participants Fund Deposit is 
exhausted pursuant to Section 3);
    (b) the existing retained earnings or undivided profits of the 
Corporation; or
    (c) any other liquidity resources as may be available to the 
Corporation from time to time, including, but not limited to, the 
End-of-Day Credit Facility.

    Section 4 of Rule 4, Second Paragraph (Proposed Fifth Paragraph):
    For conformity, DTC is proposing to modify this paragraph to 
conform with the proposed changes to the third paragraph. Specifically, 
pursuant to the proposed rule change, this paragraph would state: ``If 
the Participants Fund is applied pursuant to paragraph (a) of this 
Section, the Corporation shall promptly after the event notify each 
Participant and the SEC of the amount of the Participants Fund applied 
and the reasons therefor (``Settlement Charge Notice'').''
    In addition, to further streamline Section 4 of Rule 4, DTC is 
proposing to move the proposed amended paragraph to follow the proposed 
fourth paragraph.
    Section 4 of Rule 4, Proposed Third Paragraph:
    For enhanced transparency with respect to the governance relating 
to a pro rata application of the Participants Fund, DTC is proposing to 
add the following paragraph:
    A determination to apply the Participants Fund pursuant to this 
Section shall be made by either the Chief Executive Officer, Chief Risk 
Officer, Chief Financial Officer, a member of any management committee, 
Treasurer or any Managing Director as may be designated by the Chief 
Risk Officer from time to time. The Board of Directors (or an 
authorized Committee thereof) shall be promptly informed of the 
determination.
    Section 4 of Rule 4, Third Paragraph (Proposed Fourth Paragraph):
    Pursuant to the proposed rule change, DTC would revise this 
paragraph \26\ to make clarifying changes that reflect that a 
Participant's pro rata share of an application of the Participants Fund 
would be the same whether there is a default gap or a non-default gap. 
Specifically, DTC is proposing to (i) remove the references to ``non-
defaulting Participants,'' (ii) streamline the language by representing 
the calculation of a pro rata share as a ratio, instead of a division 
calculation, (iii) make conforming changes with the foregoing, and (iv) 
for consistency and clarity, make ministerial word changes and replace 
references to ``day'' with the defined term ``Business Day.''
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    \26\ Currently, the paragraph states: ``Each non-defaulting 
Participant's pro rata share of such application of the Participants 
Fund (each, a ``pro rata settlement charge'') shall be equal to (i) 
its Required Participants Fund Deposit, as such Required 
Participants Fund Deposit was fixed on the Business Day of such 
application less its Additional Participants Fund Deposit, if any, 
on that day, divided by (ii) the sum of the Required Participants 
Fund Deposits of all non-defaulting Participants, as such Required 
Participants Fund Deposits were fixed on that day, less the sum of 
the Additional Participants Fund Deposits, if any, of such non-
defaulting Participants on that day.''
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    In sum, DTC is proposing that this paragraph be revised to state: 
``The pro rata share of the Actual Participants Fund Deposit of any 
Participant applied pursuant to paragraph (a) shall be equal to the 
ratio of (i) the Required Participants Fund Deposit of the Participant, 
as fixed on the Business Day on which such charge is made less its 
Additional Participants Fund Deposit, if any, on that Business Day, to 
(ii) the sum of the Required Participants Fund Deposits, as fixed on 
the Business Day on which such charge is made, of all Participants so 
charged on that Business Day, less the sum of the Additional 
Participants Fund Deposits, if any, of those Participants on that 
Business Day. The amount so charged to the Actual Participants Fund 
Deposit of a Participant shall constitute a ``pro rata

[[Page 66671]]

settlement charge'' with respect to that Participant.''
    Section 4 of Rule 4, Fifth, Sixth, Seventh and Eighth Paragraphs 
(Proposed Paragraphs Six, Seven, Eight and Nine):
    There would be no changes to these paragraphs. The proposed rule 
change would not affect the Settlement Charge Termination Notification 
Period, the Settlement Charge Cap, nor the right of DTC to retain the 
entire amount of the Actual Participants Fund Deposit of a Participant 
subject to a pro rata settlement charge, up to the amount of the 
Participant's Settlement Charge Cap. The proposed rule change would not 
affect the requirement that if the Actual Participants Fund Deposit of 
a Participant is applied pursuant to Section 4 of Rule 4, and, as a 
result, the Actual Participants Fund Deposit of such Participant is 
less than its Required Participants Fund Deposit, the Participant must, 
upon the demand of DTC and within such time as DTC would require, 
deposit to the Participants Fund the amount in cash needed to eliminate 
any resulting deficiency in its Required Participants Fund Deposit.
B. Section 1(f) of Rule 4
    Section 1(f) of Rule 4 currently states, in relevant part: ``The 
Actual Participants Fund Deposits of Participants to the Participants 
Fund shall be held by the Corporation and may be used or invested as 
provided in these Rules and as specified in the Procedures. The Actual 
Participants Fund Deposits of Participants may be used (i) to satisfy 
the obligations of Participants to the Corporation, as provided in 
Section 3 of this Rule, (ii) to fund settlement among non-defaulting 
Participants, as provided in Section 4 of this Rule and (iii) to 
satisfy losses and liabilities of the Corporation incident to the 
business of the Corporation, as provided in Section 5 of this Rule.''
    In conformity with the proposed changes to Section 4 of Rule 4, DTC 
is proposing a ministerial change of removing the word ``non-
defaulting'' from Section 1(f) of Rule 4.
Anticipated Effect on and Management of Risk
    DTC believes that the proposed change to (i) amend Rule 4 to 
provide expressly that the Participants Fund may be used by DTC to fund 
a settlement gap, whether it is a default gap or a non-default gap, and 
(ii) make other technical changes, would provide enhanced transparency 
with respect to use of the Participants Fund and other resources to 
complete settlement. In this way, the proposal would enhance the 
overall efficiency and effectiveness of end-of-day settlement in 
circumstances where there is a settlement gap, thereby reducing 
Participants' risk exposure to a possible delay in end-of-day 
settlement.
    As a CSD, DTC plays a critical role in the national financial 
infrastructure. As a CSD, DTC is structured to provide for the 
settlement of book-entry transfers and pledges of interests in 
securities between Participants, and for end-of-day net funds 
settlement on each Business Day. Given its critical role, if DTC does 
not complete settlement on a given Business Day, there could be 
significant market-wide effects. Accordingly, if there is a settlement 
gap on a Business Day, access to liquidity resources needs to be 
optimized during the tight timeframe in which settlement must be 
completed. The Participants Fund is designed to be one of the 
foundational liquidity resources available to DTC. If there is 
uncertainty as to the scope and manner of DTC's use of the Participants 
Fund to complete settlement on a given Business Day, DTC's ability to 
quickly and effectively respond to and resolve any settlement gap may 
be compromised. If its ability to respond to and resolve a settlement 
issue is compromised, settlement may be delayed, possibly causing 
complications for Participants and the market.
    DTC's proposal, as described in detail above, would enhance the 
overall efficiency and effectiveness of settlement on a Business Day in 
circumstances where there is a settlement gap by facilitating timely 
action by DTC to complete settlement on a Business Day when there is a 
settlement gap, including, but not limited to, in situations where 
Section 3 of Rule 4 is not applicable. The ability of DTC to take 
timely action to fund a settlement gap, including, but not limited to, 
the pro rata application of the Participants Fund, would allow DTC to 
continue to support end-of-day net funds settlement in connection with 
book-entry transfers of securities on each Business Day.
Consistency With the Clearing Supervision Act
    DTC believes the proposed change would be consistent with the 
Clearing Supervision Act, specifically with the risk management 
objectives and principles of Section 805(b), and with certain of the 
risk management standards adopted by the Commission pursuant to Section 
805(a)(2), for the reasons described below.\27\
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    \27\ 12 U.S.C. 5464(a)(2) and (b).
---------------------------------------------------------------------------

(i) Consistency With Section 805(b) of the Clearing Supervision Act
    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.\28\
---------------------------------------------------------------------------

    \28\ 12 U.S.C. 5461(b).
---------------------------------------------------------------------------

    DTC believes the proposal is consistent with the objectives and 
principles of these risk management standards as described in Section 
805(b) of the Clearing Supervision Act.\29\
---------------------------------------------------------------------------

    \29\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

    First, the proposal would amend Section 4 of Rule 4 to provide 
expressly for the pro rata application of the Participants Fund to any 
settlement gap, including a non-default gap. As noted above, if there 
were a question as to DTC's right to apply the Participants Fund to a 
non-default gap, DTC's ability on a Business Day to quickly and 
effectively respond to and resolve any such settlement gap and complete 
settlement might be adversely affected.
    Second, the proposal would also (i) clarify that a Participant's 
pro rata share of an application of the Participants Fund would be the 
same whether there is a default gap or a non-default gap, (ii) restore 
the express provision for the optional use of a discretionary amount of 
existing retained earnings of DTC to fund settlement, (iii) 
specifically state that DTC may apply its available resources to fund 
settlement, in such order and in such amounts as it determines, in its 
sole discretion, and (iv) make ministerial changes for conformity and 
readability. Without these changes, DTC's rights with respect to the 
manner and use of its liquidity resources to fund settlement might not 
be promptly ascertainable, particularly in a time of stress.
    Taken together, the proposed changes would enhance the transparency 
of DTC's use of the Participants Fund and other resources to complete 
settlement on a Business Day. Reducing the risk of uncertainty to DTC, 
its Participants, and the market overall would promote robust risk 
management, promote safety and soundness, reduce systemic risks, and 
support the stability of the broader financial system.
    Therefore, DTC believes that the proposed changes to (i) amend Rule 
4 to provide expressly that the Participants

[[Page 66672]]

Fund may be used by DTC to fund a settlement gap, whether it is a 
default gap or a non-default gap, and (ii) make other technical changes 
to provide enhanced transparency with respect to completing settlement 
when there is a settlement gap, would be consistent with the objectives 
and principles of Section 805(b) of the Clearing Supervision Act,\30\ 
which specify the promotion of robust risk management, promotion of 
safety and soundness, reduction of systemic risks and support of the 
stability of the broader financial system by, among other things, 
strengthening the liquidity of systemically important financial market 
utilities, such as DTC.
---------------------------------------------------------------------------

    \30\ Id.
---------------------------------------------------------------------------

(ii) Consistency With Section 805(a)(2) of the Clearing Supervision Act
    Section 805(a)(2) of the Clearing Supervision Act authorizes the 
Commission to prescribe risk management standards for the payment, 
clearing and settlement activities of designated clearing entities, 
like DTC, and financial institutions engaged in designated activities 
for which the Commission is the supervisory agency or the appropriate 
financial regulator.\31\ The Commission has accordingly adopted risk 
management standards under Section 805(a)(2) of the Clearing 
Supervision Act \32\ and Section 17A of the Act (``Covered Clearing 
Agency Standards'').\33\ The Covered Clearing Agency Standards require 
covered 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.\34\
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    \31\ 12 U.S.C. 5464(a)(2).
    \32\ Id.
    \33\ 17 CFR 240.17Ad-22(e).
    \34\ Id.
---------------------------------------------------------------------------

    DTC believes the proposed changes are consistent with Rule 17Ad-
22(e)(1) of the Covered Clearing Agency Standards \35\ for the reasons 
described below.
---------------------------------------------------------------------------

    \35\ 17 CFR 240.17Ad-22(e)(1).
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(1) under the Act requires that DTC establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to provide for a well-founded, clear, transparent 
and enforceable legal basis for each aspect of its activities in all 
relevant jurisdictions.\36\
---------------------------------------------------------------------------

    \36\ Id.
---------------------------------------------------------------------------

    As discussed above, changes to Section 4 of Previous Rule 4 might 
be construed as narrowing the scope of use of the Participants Fund for 
settlement to a default gap, even though the Participants Fund is a 
liquidity resource that is available to fund any settlement gap. By 
amending Rule 4 to provide expressly that the Participants Fund 
continues to be a liquidity resource that may be used by DTC to fund a 
settlement gap to complete settlement on a Business Day, whether the 
settlement gap is the result of a Participant Default or otherwise, the 
proposed changes are designed to provide an expressly clear, 
transparent and enforceable legal basis for the application of the 
Participants Fund to a settlement gap, whether or not caused by a 
Participant Default. In this way, DTC believes the proposal is 
consistent with Rule 17Ad-22(e)(1) under the Act.\37\
---------------------------------------------------------------------------

    \37\ Id.
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III. Date of Effectiveness of the Advance Notice and Timing for 
Commission Action

    The proposed change may be implemented if the Commission does not 
object to the proposed change within 60 days of the later of (i) the 
date that the proposed change was filed with the Commission or (ii) the 
date that any additional information requested by the Commission is 
received. The clearing agency shall not implement the proposed change 
if the Commission has any objection to the proposed change.
    The Commission may extend the period for review by an additional 60 
days if the proposed change raises novel or complex issues, subject to 
the Commission providing the clearing agency with prompt written notice 
of the extension. A proposed change may be implemented in less than 60 
days from the date the advance notice is filed, or the date further 
information requested by the Commission is received, if the Commission 
notifies the clearing agency in writing that it does not object to the 
proposed change and authorizes the clearing agency to implement the 
proposed change on an earlier date, subject to any conditions imposed 
by the Commission.
    The clearing agency shall post notice on its website of proposed 
changes that are implemented.
    The proposal shall not take effect until all regulatory actions 
required with respect to the proposal are completed.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the Advance 
Notice is consistent with the Clearing Supervision 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-2020-801 on the subject line.

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-2020-801. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the Advance Notice that are filed with the 
Commission, and all written communications relating to the Advance 
Notice 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 website viewing and printing in the 
Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of DTC and on DTCC's website 
(http://dtcc.com/legal/sec-rule-filings.aspx). All comments received 
will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-DTC-2020-801 and should be submitted on 
or before November 4, 2020.

    By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-23143 Filed 10-19-20; 8:45 am]
BILLING CODE 8011-01-P