81 FR 70200 - Self-Regulatory Organizations; The Depository Trust Company; Notice of Filing of Proposed Rule Change Relating to Processing of Transactions in Money Market Instruments

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 196 (October 11, 2016)

Page Range70200-70205
FR Document2016-24499

Federal Register, Volume 81 Issue 196 (Tuesday, October 11, 2016)
[Federal Register Volume 81, Number 196 (Tuesday, October 11, 2016)]
[Notices]
[Pages 70200-70205]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-24499]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79046; File No. SR-DTC-2016-008]


Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing of Proposed Rule Change Relating to Processing of 
Transactions in Money Market Instruments

October 5, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4,\2\ notice is hereby given that on 
September 23, 2016, The Depository Trust Company (``DTC'') filed with 
the Securities and Exchange Commission (``Commission'') the proposed 
rule change as described in Items I and II below, which Items have been 
prepared by DTC.\3\ 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\ On September 23, 2016, DTC filed this proposed rule change 
as an advance notice (SR-DTC-2016-802) with the Commission pursuant 
to Section 806(e)(1) of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act entitled the Payment, Clearing, and 
Settlement Supervision Act of 2010, 12 U.S.C. 5465(e)(1), and Rule 
19b-4(n)(1)(i) of the Act, 17 CFR 240.19b-4(n)(1)(i). A copy of the 
advance notice 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 
Proposed Rule Change

    The proposed rule change would establish a change in the processing 
of transactions in money market instruments (``MMI'') that are 
processed in DTC's MMI Program (``MMI Securities'') by modifying (i) 
the DTC Rules, By-laws and Organization Certificate (``Rules''),\4\ 
(ii) the DTC Settlement Service Guide (``Settlement Guide''),\5\ and 
(iii) the DTC Distributions Service Guide (``Distributions Guide''),\6\ 
as described below.\7\ The proposed rule change would affect DTC's 
processing of issuances of MMI Securities (``Issuances'') by issuers of 
MMI Securities (``Issuers'') as well as Maturity Presentments, Income 
Presentments, Principal Presentments, and Reorganization Presentments 
(collectively, ``Presentments'') (Issuances and Presentments, 
collectively ``MMI Obligations''). The proposed rule change would amend 
the Rules and Settlement Guide to (i) eliminate intra-day reversals of 
processed but not yet settled MMI Obligations resulting from an Issuing 
and Paying Agent (``IPA'') notifying DTC of its refusal to pay 
(``RTP'') for Presentments of an Issuer's maturing MMI Securities for a 
designated Acronym; \8\ (ii) eliminate the Largest Provisional Net 
Credit (``LPNC'') risk management control; (iii) provide that the IPA 
must acknowledge its funding obligations for Presentments and that 
Receivers of Issuances must approve their receipt of those Issuances in 
DTC's Receiver Authorized Delivery (``RAD'') system before DTC would 
process MMI Presentments; (iv) implement an enhanced process to test 
risk management controls under certain conditions with respect to an 
Acronym (to be referred to as MMI Optimization, as defined below); (v) 
make updates and revisions to the Settlement Processing Schedule in the 
Settlement Guide (``Processing Schedule''), as described below, (vi) 
eliminate the ``receive versus payment NA'' control (``RVPNA''), as 
described below, and (vii) make other technical and clarifying changes 
to the text, as more fully described below. In addition, the proposed 
rule change would amend the Distributions Guide to make changes to text 
relating to the processing of Income Presentments so that it is 
consistent with the changes proposed in the Settlement Guide in that 
regard, as more fully described below.\9\
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    \4\ Available at http://www.dtcc.com/legal/rules-and-procedures.aspx.
    \5\ Available at http://www.dtcc.com/~/media/Files/Downloads/
legal/service-guides/Settlement.pdf.
    \6\ Available at http://www.dtcc.com/~/media/Files/Downloads/
legal/service-guides/
Distributions%20Service%20Guide%20FINAL%20November%202014.pdf.
    \7\ Eligibility for inclusion in the MMI Program covers MMI, 
which are short-term debt Securities that generally mature 1 to 270 
days from their original issuance date. MMI include, but are not 
limited to, commercial paper, banker's acceptances and short-term 
bank notes and are issued by financial institutions, large 
corporations, or state and local governments. Most MMI trade in 
large denominations (typically, $250,000 to $50 million) and are 
purchased by institutional investors. Eligibility for inclusion in 
the MMI Program also covers medium term notes that mature over a 
longer term.
    \8\ Rule 1, supra note 4. MMI of an Issuer are designated by DTC 
using unique four-character identifiers employed by DTC referred to 
as Acronyms. An MMI Issuer can have multiple Acronyms representing 
its Securities. MMI Transactions and other functions relating to MMI 
(e.g., confirmations and RTP) instructed and/or performed by IPAs, 
Participants and/or DTC as described herein are performed on an 
``Acronym-by-Acronym'' basis.
    \9\ Capitalized terms not otherwise defined herein have the 
respective meanings set forth in the Rules, the Settlement Guide, 
and the Distributions Guide.
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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
    The purpose of this proposed rule change is to (i) mitigate risk to 
DTC and Participants relating to intra-day reversals of processed MMI 
Obligations in the event of an IPA's RTP with respect to maturing 
obligations (``Maturing Obligations'') \10\ for an Acronym and/or 
income payments \11\

[[Page 70201]]

relating to Presentments for an Acronym, and (ii) reduce blockage for 
the completion of MMI Obligations by eliminating the LPNC control, as 
more fully described below.
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    \10\ A Maturing Obligation is a payment owed in settlement by 
the IPA to the Participant on whose behalf DTC presents the matured 
MMI Securities.
    \11\ Principal and income for an Acronym are distributed by an 
IPA according to a cycle determined by the terms of the issue (e.g., 
monthly, quarterly, and semi-annually). Such distributions may be 
for interest only, principal only, or interest and principal.
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Background
    When an Issuer issues MMI Securities at DTC, the IPA for that 
Issuer sends issuance instructions to DTC electronically, which results 
in crediting the applicable MMI Securities to the DTC Account of the 
IPA. These MMI Securities are then Delivered to the Accounts of 
applicable Participants that are purchasing the Issuance in accordance 
with their purchase amounts. These purchasing Participants typically 
include broker/dealers or banks, acting as custodians for institutional 
investors. The IPA Delivery instructions may be free of payment or, 
most often, Delivery Versus Payment. Deliveries of MMI are processed 
pursuant to the same Rules and the applicable Procedures \12\ set forth 
in the Settlement Guide, as are Deliveries generally, whether free or 
versus payment. Delivery Versus Payment transactions are subject to 
risk management controls of the IPA and Receiving Participants for Net 
Debit Cap and Collateral Monitor sufficiency,\13\ and payment for 
Delivery Versus Payment transactions is due from the receiving 
Participants through DTC's net settlement process. To the extent, if 
any, that the Participant has a Net Debit Balance in its Settlement 
Account at end-of-day, payment of that amount is due to DTC.
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    \12\ Pursuant to the Rules, the term ``Procedures'' means the 
Procedures, service guides, and regulations of the Corporation 
adopted pursuant to Rule 27, as amended from time to time. See Rule 
1, Section 1, supra note 4, at 15. The Procedures applicable to MMI 
settlement processing are set forth in the Settlement Guide. Supra 
note 5.
    \13\ Delivery Versus Payment transfers at DTC are structured so 
that the completion of Delivery of Securities to a Participant in 
end-of-day settlement is contingent on the receiving Participant 
satisfying its end-of-day net settlement obligation, if any. The 
risk of Participant failure to settle is managed through risk 
management controls, structured so that DTC may complete settlement 
despite the failure to settle of the Participant, or Affiliated 
Family of Participants, with the largest net settlement obligation. 
The two principal controls are the Net Debit Cap and Collateral 
Monitor. The largest net settlement obligation of a Participant or 
Affiliated Family of Participants cannot exceed DTC liquidity 
resources, based on the Net Debit Cap, and must be fully 
collateralized, based on the Collateral Monitor. This structure is 
designed so that DTC may pledge or liquidate Collateral of the 
defaulting Participant in order to fund settlement among non-
defaulting Participants. Liquidity resources, including the 
Participants Fund and a committed line of credit with a consortium 
of lenders, are available to complete settlement among non-
defaulting Participants.
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    When MMI Securities mature, the Maturity Presentment process is 
initiated automatically by DTC on maturity date, starting at 
approximately 6:00 a.m. Eastern Time (``ET''), for Delivery of matured 
MMI Securities from the applicable DTC Participants' Accounts to the 
applicable IPA Accounts. This automated process electronically sweeps 
all maturing positions of MMI Securities from Participant Accounts and 
debits the Settlement Account of the applicable IPA for the amount of 
the Maturing Obligations for Presentments for the Acronym and credits 
the Settlement Accounts of the Deliverers. In accordance with the 
Rules, payment is due from the IPA for settlement to the extent, if 
any, that the IPA has a Net Debit Balance in its Settlement Account at 
end-of-day.
    With regard to DTC net settlement, MMI Issuers and IPAs commonly 
consider the primary source of payments for Maturing Obligations of MMI 
Securities to be funded by the proceeds of Issuances of the same 
Acronym by that Issuer on the same Business Day. Because Presentments 
are currently processed automatically at DTC, IPAs have the option to 
refuse to pay for Maturing Obligations to protect against the 
possibility that an IPA may not be able to fund settlement because it 
has not received funds from the relevant Issuer. An IPA that refuses 
payment for a Presentment (i.e., refuses to make payment for the 
Delivery of matured MMI Securities for which it is the designated IPA 
and/or pay interest or dividend income on an MMI Security for which it 
is the designated IPA) must notify DTC of its RTP in the DTC Settlement 
User Interface. An IPA may enter an RTP until 3:00 p.m. ET on the date 
of the affected Presentment.
    Under the current Rules, the effect of an RTP is to instruct DTC to 
reverse all processed Deliveries of that Acronym, including Issuances, 
related funds credits and debits, and Presentments. This late day 
reversal of processed (but not yet settled) transactions may override 
DTC's risk management controls (i.e., Collateral Monitor and Net Debit 
Cap) and force a presenting Participant into a Net Debit Balance; this 
situation poses systemic risk with respect to the Participant's ability 
to fund its settlement and, hence, DTC's ability to complete end-of-day 
net funds settlement. Also, the possibility of intra-day reversals of 
processed MMI Obligations creates uncertainty for Participants.
    Currently, to mitigate the risks associated with an RTP, DTC Rules 
and the Settlement Guide provide for the LPNC risk management control. 
DTC withholds credit intra-day from each Participant that has a 
Presentment in the amount of the aggregate of the two largest credits 
with respect to an Acronym. The LPNC is not included in the calculation 
of the Participant's Collateral Monitor or its Net Debit Balance. This 
provides protection in the event that MMI Obligations are reversed by 
DTC as a result of an RTP.\14\
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    \14\ See Securities Exchange Act Release No. 71888 (April 7, 
2014), 79 FR 20285 (April 11, 2014) (SR-DTC-2014-02) (clarifying the 
LPNC Procedures in the Settlement Guide) and Securities Exchange Act 
Release No. 68983 (February 25, 2013), 78 FR 13924 (March 1, 2013) 
(SR-DTC-2012-10) (updating the Rules related to LPNC).
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    DTC's Rules and Procedures relating to settlement processing for 
the MMI Program \15\ were designed to limit credit, liquidity, and 
operational risk for DTC and Participants. In connection with ongoing 
efforts by DTC to evaluate the risk associated with the processing of 
MMI Obligations, DTC has determined that the risks presented by intra-
day reversals of processed MMI Obligations should be eliminated to 
prevent the possibility that a reversal could override risk controls 
and heighten liquidity and settlement risk. Eliminating intra-day 
reversals of processed MMI Obligations would also enhance intra-day 
finality and allow for the elimination of the LPNC which creates intra-
day blockage and affects liquidity through the withholding of 
settlement credits.
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    \15\ The Procedures applicable to MMI settlement processing are 
set forth in the Settlement Guide. Supra note 5.
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Proposal
    The proposed rule change would amend the Rules and the Settlement 
Guide to eliminate provisions for intra-day reversals of processed MMI 
Obligations based on an IPA's RTP or Issuer insolvency. In addition, 
the proposed rule change would amend the Distributions Guide to make 
changes to text relating to the processing of Income Presentments so 
that it is consistent with the changes proposed in the Settlement Guide 
in that regard, as more fully described below.
    Pursuant to the proposed rule change, DTC would no longer 
automatically process Presentments (and Issuances and related 
deliveries). Rather, except as noted below, DTC would only process 
these transactions after an acknowledgment (``MMI Funding 
Acknowledgment'') is made by the IPA to DTC whereby either: (i) The 
value of

[[Page 70202]]

receiver-approved \16\ Issuances alone,\17\ or a combination of 
receiver-approved Issuances plus an amount the IPA(s) has acknowledged 
has been funded by the Issuer, exceeds the Acronym's Presentments; or 
(ii) the IPA acknowledges it has been funded for the entire amount of 
the gross value of an Acronym, regardless of Issuances.\18\
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    \16\ DTC subjects certain transactions to receiver approval in 
its RAD system.
    \17\ An affirmative MMI Funding Acknowledgement by the IPA would 
not be required in the case that the aggregate amount of RAD 
approved Issuances of an Acronym exceeds the aggregate amount of 
Presentments since these Issuances would provide the funding of the 
maturing obligations versus an Issuer having to fund the IPA. The 
proposed rule change would provide that in this instance, the IPA is 
deemed to provide a standing instruction to process transactions in 
the Acronym, subject to risk management controls. Any such 
instruction or deemed instruction by the IPA would be irrevocable 
once given.
    \18\ In the case where an affirmative MMI Funding Acknowledgment 
by the IPA would be required for Presentments to be processed, the 
MMI Funding Acknowledgement would be a notification provided by an 
IPA to DTC with respect to an Acronym that the IPA acknowledges and 
affirms its funding obligation for a maturing Acronym either (i) in 
the entire amount of the Acronym or (ii) for an amount at least 
equal to the difference between the value of Issuances and the value 
of the Presentments. In the case of (ii) above, the IPA may (later 
that day) increase the funding amount it acknowledges, but in no 
event may the IPA reduce the amount of its obligation previously 
acknowledged that day.
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    DTC anticipates that the proposed rule change would generally 
maintain the volume of transactions processed today in terms of the 
total number and value of transactions that have passed position and 
risk controls throughout the processing day. However, because of the 
requirement for the IPA to provide an MMI Funding Acknowledgement prior 
to processing of an Acronym, the reason why transactions do not 
complete during the processing day would shift. It is expected that the 
value and volume of MMI transactions recycling for risk management 
controls during the late morning and afternoon time periods would be 
reduced as a result of MMI transactions being held outside of the 
processing system awaiting an MMI Funding Acknowledgement decision. The 
non-MMI transactions and fully funded MMI transactions would also 
likely have a reduction in blockage from risk management controls as a 
result of the elimination of the LPNC control. The elimination of the 
LPNC control would no longer withhold billions of dollars of settlement 
credits until 3:05 p.m. ET as it does today, which would in turn permit 
these transactions to complete earlier in the day.
    An IPA would make an MMI Funding Acknowledgment using a new 
Decision Making Application (``DMA''). When an MMI Funding 
Acknowledgement has occurred, it would constitute the IPA's instruction 
to DTC to attempt to process transactions in the Acronym. At this 
point, if the IPA has acknowledged that it would fully fund the 
Acronym, then the transactions would be sent to the processing system 
and attempted against position and risk management controls. If the IPA 
provides an MMI Funding Acknowledgement for only partial funding of the 
entire amount of Presentments for an Acronym, DTC would test risk 
management controls of Deliverers and Receivers with respect to that 
Acronym to determine whether risk management controls would be 
satisfied by all Deliverers and Receivers of the Acronym and determine 
whether all parties maintain adequate position to complete the 
applicable transactions, i.e., ``MMI Optimization''. In the case that 
the aggregate amount of RAD approved Issuances of an Acronym exceeds 
the aggregate amount of Presentments, and thus an affirmative 
acknowledgment by the IPA would not be required, risk management 
controls for all Deliverers and Receivers would be tested using MMI 
Optimization as well.
    As indicated above, if partial funding from the IPA is necessary, 
then transactions would be routed to MMI Optimization. Generally, in 
MMI Optimization, all Deliverers and Receivers of the Acronym must 
satisfy risk management controls and delivering Participants must hold 
sufficient position, in order for the transactions in that Acronym to 
be processed. However, as long as the Issuances that can satisfy 
Deliverer and Receiver risk controls for that Acronym are equal to or 
greater than the Maturing Presentments of that Acronym, the applicable 
transactions (i.e., those that pass risk controls) would be processed. 
If there are multiple IPAs for an Acronym, DTC would determine funding 
based on the satisfaction of conditions for all Receivers and 
Deliverers with respect to all Presentments, Issuances and applicable 
DOs in the Acronym and MMI Funding Acknowledgements for all IPAs with 
Issuances and Presentments in the Acronym. No instruction of an IPA to 
DTC to process the subject MMI transactions shall be effective until 
MMI Optimization is satisfied with respect to all transactions in the 
Acronym.
    If there is no MMI Funding Acknowledgment for the IPA for an 
Acronym for which Maturing Obligations are due by 3:00 p.m. ET on that 
day and/or DTC is aware that the Issuer of an Acronym is insolvent 
(``Acronym Payment Failure''), then DTC would not process transactions 
in the Acronym.\19\
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    \19\ DTC would automatically consider an Acronym Payment Failure 
occurring due to an IPA's failure to provide timely MMI Funding 
Acknowledgement (i.e., provide the acknowledgment by 3:00 p.m. ET) 
as an RTP.
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    In the event of an Acronym Payment Failure, DTC would (i) prevent 
further issuance and maturity activity for the Acronym in DTC's system, 
(ii) prevent Deliveries of MMI Securities of the Acronym on failure 
date and halt all activity in that Acronym, (iii) set the Collateral 
Value of the MMI Securities in the Acronym to zero for purposes of 
calculating the Collateral Monitor of any affected Participant, and 
(iv) notify Participants of the Acronym Payment Failure. Notification 
would be made through a DTC broadcast through the current process.
    Notwithstanding the occurrence of an Acronym Payment Failure, the 
IPA would remain liable for funding pursuant to any MMI Funding 
Acknowledgment previously provided for that Business Day.
    A ``Temporary Acronym Payment Failure'' with respect to Income 
Presentments would occur when an IPA notifies DTC that it temporarily 
refuses to pay Income Presentments for the Acronym (typically due to an 
Issuer's inability to fund Income Presentments on that day). A 
Temporary Acronym Payment Failure would only be initiated if there are 
no Maturity Presentments, Principal Presentments and/or Reorganization 
Presentments on that Business Day. DTC expects the Issuer and/or IPA to 
resolve such a situation by the next Business Day. In the event of a 
Temporary Acronym Payment Failure, DTC would (i) temporarily devalue to 
zero all of the Issuer's MMI Securities for purposes of calculating the 
Collateral Monitor, unless and until the IPA acknowledges funding with 
respect to the Income Payments on the following Business Day, (ii) 
notify Participants of the delayed payment through a DTC broadcast as 
is the current process today, and (iii) block from DTC's systems all 
further Issuances and maturities by that Issuer for the remainder of 
the Business Day on which notification of the Temporary Payment Failure 
was received by DTC.
    An IPA would not be able to avail itself of a Temporary Acronym 
Payment Failure for the same Acronym on consecutive Business Days.
    Also, in light of the proposed elimination of intra-day reversals 
of processed MMI Obligations, DTC would also eliminate the RVPNA 
control. The RVPNA control is provided for in the

[[Page 70203]]

Settlement Guide and implements current Section 1(c) of Rule 9(B). 
RVPNA is used to prevent a Participant from Delivering free of value or 
undervalued any MMI Securities received versus payment on the same 
Business Day.\20\ This protects DTC against being unable to reverse 
transactions for Deliveries Versus Payment of MMI Securities in the 
event of an RTP by the IPA.\21\ The elimination of reversals of 
processed MMI Obligations would eliminate the need for the RVPNA 
control.
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    \20\ For purposes of RVPNA, MMI Securities are considered 
undervalued if they are Delivered Versus Payment for less than 10 
percent below market value.
    \21\ For example, if A Delivers MMI Securities to B versus 
payment and B Delivers the same MMI Securities to C free of payment 
(subject to risk management controls), under Rule 9(B), Section 1, 
the Delivery to C is final when the securities are credited to C. 
DTC would therefore be unable to reverse the Delivery to C and thus 
it cannot reverse the Delivery from B to A.
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Proposed Rule Changes to the Rules, Settlement Guide, and Distributions 
Guide
    DTC would amend the text of Rule 1 (Definitions), Rule 9(A) 
(Transactions in Securities and Money Payments), Rule 9(B) 
(Transactions in Eligible Securities), Rule 9(C) (Transactions in MMI 
Securities), the Settlement Guide and the Distributions Guide to 
reflect the proposed changes described above. Specifically:
    (i) Rule 1 would be amended to:
    a. Delete the definition of LPNC; and
    b. Add a cross-reference to indicate that the terms MMI Funding 
Acknowledgment and MMI Optimization would be defined in Section 1 of 
Rule 9(C).
    (ii) Rule 9(A) would be amended to add text providing that an 
instruction to DTC from a Participant for Delivery Versus Payment of 
MMI Securities pursuant to Rule 9(C) shall not be effective unless and 
until applicable conditions specified in Rule 9(C) as set forth below 
have been satisfied.
    (iii) Rule 9(B) would be amended to:
    a. Eliminate text referencing the LPNC;
    b. Eliminate the provision precluding DTC from acting on an 
instruction for Delivery of MMI Securities subject of an Incomplete 
Transaction if the instruction involves a Free Delivery, Pledge or 
Release of Securities or a Delivery, Pledge or Release of Securities 
substantially undervalued; and
    c. Add text providing that an instruction to DTC from a Participant 
for Delivery Versus Payment of MMI Securities pursuant to Rule 9(C) 
shall not be effective unless and until the applicable conditions 
specified in Rule 9(C) described below have been satisfied.
    (iv) Rule 9(C) would be amended to:
    a. Add the definitions of MMI Funding Acknowledgment and MMI 
Optimization to reflect the meaning of these terms as described above;
    b. Add text that Delivery Versus Payment of MMI Securities would be 
affected in accordance with Rules 9(A), 9(B) and the Settlement Guide 
in addition to Rule 9(C);
    c. Add text indicating that instructions by a Presenting 
Participant for a Presentment or Delivery of MMI Securities would be 
deemed to be given only when any applicable MMI Funding Acknowledgment 
has been received by DTC;
    d. Remove conditions and references relating to reversals of 
processed MMI Obligations;
    e. Set forth conditions for the processing of Presentments, 
including:
    i. The requirement for the IPA to provide an MMI Funding 
Acknowledgment, except in the case where the aggregate amount of 
Issuances exceeds Presentments;
    ii. Satisfaction of risk management controls and RAD;
    iii. That an instruction to DTC with respect to an Issuance or 
Presentment shall become effective upon satisfaction of the provisions 
described in i. and ii. immediately above;
    iv. That DTC shall comply with an effective instruction;
    v. That the IPA acknowledges and agrees that DTC would process 
instructions with respect to Issuances and Presentments as described 
above and that the IPA's obligations in this regard are irrevocable; 
and
    vi. That if the IPA notifies DTC in writing of its insolvency, or 
if DTC otherwise has notice, or if the IPA issues a Payment Refusal for 
the Acronym, then the IPA would not be required to acknowledge its 
obligations and DTC would not be required to process any further 
instructions with respect to the applicable Acronym;
    f. Eliminate references to MMI Securities being devalued in the 
event of an RTP because in the event of any payment failure by the IPA, 
DTC would then revert to the Acronym Payment Failure Process described 
below; and
    g. Delete a reference indicating that DTC's Failure to Settle 
Procedure includes special provisions for MMI Securities.
    (v) The Settlement Guide would be amended to:
    a. Delete the description of, and all references and provisions 
related to, LPNC;
    b. Delete: (A) The definition of RVPNA, (B) a provision that 
transactions for MMI Securities that are deemed RVPNA would recycle 
pending release of the LPNC control at 3:05 p.m. ET, and (C) a note 
that MMI Securities received versus payment are not allowed to be 
freely moved until the LPNC control is released;
    c. Add a description of ``Unknown Rate'' to provide for a 
placeholder in the Settlement Guide for references to an interest rate 
where payment of interest by an IPA to Receivers is scheduled but the 
interest rate to be paid is not known at the time;
    d. Change the heading of the section currently named ``Establishing 
Your Net Debit Cap'' to ``Limitation of Participant Net Debit Caps by 
Settling Banks'' to reflect the context of that section more 
specifically;
    e. Revise the Settlement Processing Schedule to:
    i. Add a cutoff time of 2:30 p.m. ET for an IPA to replace the 
Unknown Rate with a final interest rate and state that the IPA must 
successfully transmit the final rate to DTC before 2:30 p.m. ET;
    ii. Add a cutoff time of 2:55 p.m. ET after which Issuances and 
Presentments cannot be processed on the given Business Day because the 
conditions described above for processing of MMI Obligations have not 
been met;
    iii. Remove a reference for a cutoff relating to reversals of MMI 
Obligations since reversals would no longer occur as described above;
    iv. Define 3 p.m. ET as the cutoff time for any required MMI 
Funding Acknowledgements to be received in order for DTC to be able to 
process for a given Acronym that day;
    v. Add at cutoff time of 3 p.m. ET for an IPA to notify DTC of a 
Temporary Acronym Payment Failure;
    vi. Delete a reference to the release of LPNC controls as LPNC 
would no longer exist; and
    vii. Clarify that a 3:10 p.m. ET cutoff after which CNS 
transactions that cannot be completed would be dropped from the system, 
also applies to valued transactions in non-MMI Securities and fully 
paid for and secondary MMI Deliveries or Maturity Presentments;
    f. Add a section describing MMI Processing to include a description 
of MMI Funding Acknowledgments and the MMI Optimization process as 
described above;
    g. Revise the section referencing provisions for ``Issuer Failure 
Processing'' to instead describe Acronym Payment Failure Processing and 
Temporary Acronym Payment Failure Process, as these processes are 
described above, since the contingencies

[[Page 70204]]

for processing a payment failure hinge on the failure of payment on an 
Acronym by an IPA regardless of whether it is ultimately caused by an 
Issuer insolvency or otherwise;
    h. Remove a duplicate reference to the DTC contact number for 
Participants/IPAs to call in the event of an Acronym Payment Failure;
    i. Remove the description of the ``MMI IPA MP Pend'' process which 
was designed to allow IPAs to minimize the impact of potential 
reversals of processed MMI Obligations; as such reversals would no 
longer occur; and
    j. Change the name of the section named ``Calculating Your Net 
Debit Cap'' to ``Calculation of Participant Net Debit Caps''.
    (vi) The Distributions Guide would be amended to (i) delete 
language reflecting that Income Presentments are processed at the 
start-of-day, and (ii) add a brief description of the processing of 
Presentments as proposed above and provide a cross-reference to the 
Settlement Guide relating to MMI settlement processing.
    (vii) The proposed rule change would also make technical and 
clarifying changes to the texts of the Rules and Settlement Guide for 
consistency throughout the texts in describing the concepts and terms 
set forth above, make corrections to grammar and spacing and edit text 
to provide for enhanced readability.
Implementation
    The proposed rule change would be implemented in phases whereby 
Acronyms would be migrated to be processed in accordance with the 
proposed rule change over a period of five months beginning in November 
2016 and with all Acronyms expected to be implemented by the end of 
March 2017, except for the implementation of the elimination of the 
Rule and Settlement Guide provisions relating to RVPNA which 
elimination would not occur until all other aspects of the proposed 
rule change are implemented with respect to all Acronyms. DTC would 
announce phased implementation dates for proposed rule change via 
Important Notice upon all applicable regulatory approval by Commission.
2. Statutory Basis
    Section 17A(b)(3)(F) of the Act \22\ requires that the rules of the 
clearing agency be designed, inter alia, to promote the prompt and 
accurate clearance and settlement of securities transactions. DTC 
believes that the proposed rule change is consistent with this 
provision of the Act because (i) the elimination of intra-day reversals 
of processed MMI Obligations would promote the intra-day finality of 
those MMI Obligations, (ii) the deletion of the LPNC control would make 
available settlement credits to reduce blockage from Net Debit Caps, 
(iii) implementation of the MMI Optimization process would provide 
increased efficiency in testing risk controls in order to facilitate 
timely processing of transactions under the proposal, (iv) elimination 
of the RVPNA control would allow intraday processing of Free Deliveries 
of MMI Securities received for value, (v) the proposed updates and 
revisions to the Processing Schedule would accommodate the processing 
changes required to implement the proposal to promote intra-day 
finality, and (vi) the proposed technical changes to texts of the Rules 
and Settlement Guide, as described above, would simplify and clarify 
terms and concepts in the Rules and Settlement Guide text for 
Participants with respect to MMI transaction processing at DTC. 
Therefore, as applicable, by (i) promoting intra-day finality of MMI 
transactions, (ii) reducing potential blockages in transaction 
processing, (iii) facilitating more efficient application of risk 
management controls to allow processing of pending transactions, (iv) 
allowing intraday processing of Free Deliveries of MMI Securities 
received for value, (v) updating the Processing Schedule in order to 
accommodate the proposed changes that would promote intra-day finality, 
and (vi) clarifying and updating terms and concepts in the Rules and 
the Settlement Guide related to processing of MMI transactions, the 
proposal would promote the prompt and accurate clearance and settlement 
of MMI Securities processed through DTC consistent with the Act, in 
particular Section 17A(b)(3)(F) cited above.
---------------------------------------------------------------------------

    \22\ 15 U.S.C. 78q-1(b)(3)(F).
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    Rule 17Ad-22(d)(12) promulgated under the Act \23\ requires (i) 
that each registered clearing agency shall establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to, as applicable, ensure that final settlement occurs no 
later than the end of the settlement day, and (ii) that intraday or 
real-time finality be provided where necessary to reduce risks. DTC 
believes that the proposed rule change is consistent with Rule 17Ad-
22(d)(12) because the elimination of intraday reversals of MMI 
transactions would promote settlement finality of processed MMI 
Obligations and prevent the possibility that a reversal could override 
risk controls and heighten liquidity and settlement risk.
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    \23\ 17 CFR 240.1717Ad-22(d)(12)
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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 
adverse impact, or impose any burden, on competition. Moreover, because 
the proposed rule change improves the efficiency of intraday processing 
and settlement finality at DTC, for MMI transactions and others, the 
proposed rule change may have a positive effect on competition among 
DTC Participants, including IPAs.
    Although the proposed rule change imposes a new requirement on 
IPAs, to provide an MMI Funding Acknowledgment under the proposed rule, 
any burden on the IPAs in making these determinations and taking these 
actions is justified by the elimination of late day reversals, 
improving settlement finality for all Participants engaged in MMI 
transactions. Moreover, the change was requested by the IPA community 
and DTC believes, based upon discussion with its IPA Participants, that 
there is no differential effect among IPA Participants due to his 
additional requirement, thus imposing no burden on competition.
    The elimination of the LPNC further improves efficiency of intraday 
processing at DTC for all transactions, including MMI transactions, by 
eliminating liquidity blockages due to the withholding of credits under 
the LPNC control; this improved efficiency should also foster 
competition.

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

    DTC has not solicited and does not intend to solicit comments 
regarding the proposed rule change. DTC has not received any 
unsolicited written comments from interested parties. To the extent DTC 
receives written comments on the proposed rule change, DTC will forward 
such comments to the Commission. DTC has conducted industry outreach 
with respect to the proposal including discussion with industry 
associations and IPAs.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its

[[Page 70205]]

reasons for so finding or (ii) as to which the self-regulatory 
organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.
    The proposal shall not take effect until all regulatory actions 
required with respect to the proposal are completed.\24\
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    \24\ See supra note 3 (regarding filing of related advance 
notice).
---------------------------------------------------------------------------

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 [email protected]. Please include 
File Number SR-DTC-2016-008 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-DTC-2016-008. 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 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-2016-008 and should be 
submitted on or before November 1, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-24499 Filed 10-7-16; 8:45 am]
 BILLING CODE 8011-01-P


Current View
CategoryRegulatory Information
CollectionFederal Register
sudoc ClassAE 2.7:
GS 4.107:
AE 2.106:
PublisherOffice of the Federal Register, National Archives and Records Administration
SectionNotices
FR Citation81 FR 70200 

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