81 FR 71774 - Self-Regulatory Organizations; The Depository Trust Company; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Clarify Certain Rules Provisions Relating to Pledges

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 201 (October 18, 2016)

[Federal Register Volume 81, Number 201 (Tuesday, October 18, 2016)]
[Notices]
[Pages 71774-71776]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-25087]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79088; File No. SR-DTC-2016-009]


Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
To Clarify Certain Rules Provisions Relating to Pledges

October 12, 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 October 
3, 2016, The Depository Trust Company (``DTC'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change as described in Items I, II and III below, which Items have been 
prepared by DTC. DTC filed the proposed rule change pursuant to Section 
19(b)(3)(A) of the Act \3\ and Rule 19b-4(f)(4) thereunder.\4\ The 
proposed rule change was effective upon filing with the Commission. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(4).
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change consists of modifications to the DTC 
Rules, By-laws and Organization Certificate (``Rules'') \5\ in order to 
clarify certain provisions relating to DTC's Pledge services, as 
described in greater detail below.\6\
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    \5\ Available at http://www.dtcc.com/~/media/Files/Downloads/
legal/rules/dtc_rules.pdf.
    \6\ Capitalized terms not defined herein are defined in the 
Rules, supra note 5.
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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
Delivery or Pledge of Securities at DTC
    DTC holds Eligible Securities on behalf of its Participants and 
reflects the transfer of interests in those securities by computerized 
book entry. There are two fundamental types of book-entry transfer 
under the Rules: Delivery and Pledge. A Delivery or a Pledge may be 
made (i) free of payment, where no funds are transferred through DTC, 
or (ii) versus payment through DTC net funds settlement in the ordinary 
course of business. The clarifying amendments in the proposed rule 
change relate to Pledges.
    A Participant may instruct DTC to Deliver Securities from its 
Account to the Account of another Participant, in which case ownership 
of the Securities is transferred to the Receiver. Alternatively, a 
Participant (in this context, a Pledgor) that is granting a

[[Page 71775]]

security interest in the Securities may instruct DTC to Pledge those 
Securities to the Pledgee Account of its counterparty (the Pledgee), in 
which case a security interest may be transferred.\7\ The Pledgor 
continues to own the Securities, subject to the Pledge, and the Pledgee 
may Release the Pledged Securities to the Pledgor. The Rules further 
provide that the Pledgee may exercise control of the Pledged Securities 
by instructing DTC to transfer the Pledged Securities to its 
Participant Account (if it is a Participant) or to the Account of 
another Participant, in either case, without the further consent of the 
Pledgor.\8\
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    \7\ The interest transferred is, however, only a security 
interest if the Pledgor and Pledgee have an agreement outside of DTC 
that constitutes a security agreement under applicable law and as to 
which the other requirements for attachment and enforceability of a 
security interest have been satisfied. See, e.g., N.Y. U.C.C. Law 
Sec.  9-203.
    \8\ By giving such an instruction to the Corporation, the 
Pledgee represents that it is acting in accordance with applicable 
law and agreements. Rule 9(B), Section 1, supra note 5. Typically, a 
Pledgee would take this step only in the event of a default of its 
Pledgor under the outside agreements governing the Pledge.
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    As noted above, the characterization of any Pledge depends on 
agreements between the Pledgor and the Pledgee made outside of DTC. DTC 
does not inquire into the terms and conditions of those agreements but 
affords its Participants the means to Pledge the Securities by book-
entry and, thereby, to perfect any properly created security interest 
with Control.\9\
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    \9\ See, e.g., N.Y. U.C.C. Law Sec.  8-106 and Sec.  9-106.
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    The Rules around Pledges were originally drafted primarily for bank 
loan transactions, where the Pledgee at DTC was typically a bank, 
lending to the counterparty Participant/Pledgor against inventory of 
the Participant held at DTC. If the Pledgee was also a Participant, it 
might receive the Pledge Versus Payment and fund the loan through DTC 
net funds settlement. This is rare, however, and most Pledges are made 
free of payment, against funding outside of DTC.
    However, the Rules were not intended to be limited to this 
scenario; for instance, the definition of Pledgee prior to this 
proposed rule change allows for Pledgees that are not only banks.\10\ 
DTC also offers Pledge services for transactions that are not bank 
loans, to Pledgees that are not banks. For example, Participants 
writing an option to buy or sell securities on an options exchange may 
pledge securities to the Options Clearing Corporation (``OCC'') \11\ to 
collateralize that option. For this purpose, Participants may pledge 
the underlying securities to the Pledgee Account of OCC at DTC.\12\
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    \10\ Pursuant to Rule 1 and Rule 2, Section 3, supra note 5, a 
Pledgee may be a bank, trust company or other person approved by DTC 
that enters into an agreement with DTC that is satisfactory to DTC.
    \11\ OCC is the sole clearing organization for all securities 
options exchanges, also servicing certain futures markets in the 
U.S., and is registered as a clearing agency with the Commission and 
as a derivatives clearing organization with the Commodity Futures 
Trading Commission. See The Options Clearing Corporation Disclosure 
Framework for Financial Market Infrastructures (January 31, 2016) 
available at http://www.optionsclearing.com/components/docs/risk-management/pfmi-disclosures.pdf, at 6.
    \12\ See DTC Settlement Service Guide (``Guide'') available at 
http://www.dtcc.com/~/media/Files/Downloads/legal/service-guides/
Settlement.pdf., at 9.
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    In recognition of the various types of financing or collateral 
transactions for which a Pledge may be used, this proposed rule change 
would delete specific references to banks or loans, clarify that other 
types of financial institutions may be Pledgees, and make conforming 
changes to selected provisions relating to these matters.\13\
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    \13\ Note that a Pledgee may but need not be a Participant, if 
it satisfies the further conditions of the Rules, supra note 10. A 
Pledgee that is not a Participant may not receive a Pledge Versus 
Payment. Rule 2, Section 3, supra note 5.
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Proposed Rule Changes
    The proposed rule change would modify Rule 1 (Definitions) and Rule 
2 (Participants and Pledgees) to clarify that the Rules do not require 
(i) an entity to be a bank or to have engaged in a loan transaction 
with a Participant in order to qualify as a Pledgee, nor do the Rules 
require (ii) that Securities underlying a Pledge need to be pledged in 
connection with a loan. In addition, the definition of Pledgee would be 
updated to expressly include broker-dealers. Although the definition 
already allows types of entities other than banks to be Pledgees, the 
change should eliminate any ambiguity for this group of financial 
institutions that are already a permitted type of Participant pursuant 
to Rule 3 (Participants Qualifications).
    In addition, pursuant to the proposed rule change, the Rules would 
be revised for other technical and clarifying changes to:
    (i) Clarify in Rule 1 that the terms Collateral and Collateral 
Monitor are used in the context of the obligations of Participants and 
that the underlying computations and recording of Collateral and 
Collateral Monitor relate to the applicable Business Day on which they 
occur;
    (ii) Clarify in Rule 1 that the term Collateral Value is used with 
respect to the Collateral of a Participant and that computations of 
Collateral Value relate to the applicable Business Day on which they 
occur;
    (iii) Clarify in Rule 1 that an instruction from a Participant or 
Pledgee to the Corporation with respect to a Release of a Security 
credited to a Securities Account constitutes an Entitlement Order (in 
addition to a Delivery, Pledge or Withdrawal constituting Entitlement 
Orders as is already stated therein);
    (iv) Delete a reference in the Rule 1 definition of Free Delivery 
that a Free Delivery is made as provided in Rule 9(A) (Transactions in 
Securities and Money Payments) because Free Deliveries by their nature 
do not involve money payments through DTC's system;
    (v) Clarify in the Rule 1 definition of Free Pledge that a Free 
Pledge is made as provided in Rule 9(B) (in addition to Section 3 of 
Rule 2 and as specified in the Procedures) since Rule 9(B) applies to 
instructions to DTC to effect a Delivery, Pledge, Release or Withdrawal 
of Securities;
    (vi) Specify in the Rule 1 definition of Free Release the section 
number (i.e., Section 3) of Rule 2 (in addition to Rule 9(B) and the 
Procedures as already referenced therein) under which the definition of 
Free Release is provided for rather than stating a general reference to 
Rule 2 in this regard;
    (vii) Clarify the definition of Lender in Rule 1 consistent with 
the Rules generally to include that other lenders in addition to banks 
may extend credit to DTC for purposes authorized by the Rules;
    (viii) Clarify clause (2) of the definition of Pledge in Rule 1 to 
eliminate any ambiguity as to the scope of clause (2) by adding the 
words ``including for purposes of Rule 4(A)'' and the words ``or 
providing for'' a security interest, so that there can be no doubt that 
clause (2) also applies to Rule 4(A) of the DTC Rules and that a 
``Pledge'' on the books of DTC is not limited to the creation of a 
security interest but may also provide for a security interest 
consistent with applicable law;
    (ix) Clarify the text of the definition of Pledged Security in Rule 
1 to (a) simply state that the term Pledged Security means a Deposited 
Security which is the subject of a Pledge, rather than stating that the 
term means a Deposited Security which is the subject of a Free Pledge 
or Pledge Versus Payment, and (b) delete descriptive language relating 
to Pledges that is redundant to the meaning of the term Pledge as set 
forth in Rule 1;
    (x) Add language to the definition of Limited Participant in Rule 1 
in order to eliminate a potential ambiguity and

[[Page 71776]]

state that the term Limited Participant does not include a Pledgee; 
\14\
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    \14\ Although a Pledgee must sign an agreement with DTC and is 
bound by the Rules, a Pledgee need not be a Participant (although a 
Participant may also be a Pledgee), supra note 13.
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    (xi) Clarify in Section 2 of Rule 2 that a Pledgee (in addition to 
a Participant) that utilizes the services of DTC for another Person 
does so as principal so far as the rights of DTC, and other 
Participants and Pledgees are concerned;
    (xii) Clarify text in Section 3 of Rule 2 that a Pledge relates to 
Deposited Securities rather than Securities in general; and
    (xiii) Conform text in Rule 1 and Rule 2 for readability, grammar 
and usage.
Implementation
    The proposed rule change would become effective upon filing with 
the Commission.
2. Statutory Basis
    Section 17A(b)(3)(F) \15\ of the Act 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 the proposed rule change is consistent with this provision 
because the proposed rule change consists of technical changes to the 
texts of the Rules as described above that would provide enhanced 
clarity with respect to the Participants that may use, and transactions 
that may be submitted through, DTC Pledge services. Therefore, by 
clarifying for Participants the types of transactions they may submit 
for processing through DTC Pledge services, the proposed rule change 
would promote the prompt and accurate clearance and settlement of 
securities transactions.
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    \15\ 15 U.S.C. 78q-1(b)(3)(F).
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(B) Clearing Agency's Statement on Burden on Competition

    DTC does not believe that the proposed rule change would have any 
impact or impose any burden on competition because it merely makes 
technical and clarifying changes to the Rules that do not impact the 
rights or obligations of Participants.

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

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

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) \16\ of the Act and paragraph (f) of Rule 19b-4 \17\ 
thereunder. At any time within 60 days of the filing of the proposed 
rule change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.
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    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 17 CFR 240.19b-4(f).
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IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-DTC-2016-009 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-2016-009. 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-2016-009 and should be 
submitted on or before November 8, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-25087 Filed 10-17-16; 8:45 am]
 BILLING CODE 8011-01-P