82 FR 17483 - Self-Regulatory Organizations; The Depository Trust Company; Notice of Filing of Proposed Rule Change To Address and Update Practices and Policies With Respect to the Credit Risk Rating Matrix and Make Other Changes
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 82, Issue 68 (April 11, 2017)
Federal Register Volume 82, Issue 68 (April 11, 2017)
| Page Range | 17483-17489 | |
| FR Document | 2017-07181 |
[Federal Register Volume 82, Number 68 (Tuesday, April 11, 2017)] [Notices] [Pages 17483-17489] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2017-07181] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-80382; File No. SR-DTC-2017-002] Self-Regulatory Organizations; The Depository Trust Company; Notice of Filing of Proposed Rule Change To Address and Update Practices and Policies With Respect to the Credit Risk Rating Matrix and Make Other Changes April 5, 2017. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that on March 22, 2017, The Depository Trust Company (``DTC'') filed with the Securities and Exchange Commission (``Commission'') the proposed rule change as described in Items I, II and III below, which Items have been prepared by the clearing agency.\3\ The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. \3\ On March 22, 2017, DTC filed this proposed rule change as an advance notice (SR-DTC-2017-801) with the Commission 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, 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. --------------------------------------------------------------------------- I. Clearing Agency's Statement of the Terms of Substance of the Proposed Rule Change The proposed rule change consists of amendments to DTC's Rules, By- Laws and Organization Certificate (``Rules'').\4\ The proposed rule change would amend Rules 1 and 2 in order to (i) address and update DTC's practices and policies with respect to the existing matrix (hereinafter referred to as the ``Credit Risk Rating Matrix'' or ``CRRM''), which was, as described in an earlier DTC rule filing,\5\ developed by DTC to assign a credit rating to certain Participants (``CRRM-Rated Participants'') by evaluating the risks posed by CRRM- Rated Participants to DTC and its Participants from providing services to these CRRM-Rated Participants and (ii) make other amendments to the Rules to provide more transparency and clarity regarding DTC's current ongoing membership monitoring process. --------------------------------------------------------------------------- \4\ Capitalized terms not defined herein are defined in the Rules, available at www.dtcc.com/~/media/Files/Downloads/legal/ rules/dtc_rules.pdf. \5\ See Securities Exchange Act Release No. 53655 (April 14, 2006), 71 FR 20428 (April 20, 2006) (SR-DTC-2006-03) (order of the Commission) approving a proposed rule change (``2006 Rule Change'') of DTC to amend the criteria used by DTC to place Participants on surveillance status, including, but not limited to DTC's application of the CRRM and the placement of lower rated CRRM-Rated Participants on an internal list in order to be monitored more closely (``Watch List''). --------------------------------------------------------------------------- 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 proposed rule change would amend Rules 1 and 2 in order to (i) address and update DTC's practices and policies with respect to the CRRM and (ii) provide more transparency and clarity regarding DTC's current membership monitoring process. In this regard, the proposed rule change would (i) add proposed definitions for the terms ``Credit Risk Rating Matrix'' and ``Watch List'' to Rule 1 (Definitions), as discussed below and (ii) amend Rule 2 (Participants and Pledgees) to (A) clarify a provision in Section 1 relating to the types of information a Participant must provide to DTC upon DTC's request for the Participant to demonstrate its satisfactory financial condition and operational capability, including its risk management practices with respect to services of DTC utilized by the Participant for another Person and (B) add a new Section 10 to include provisions relating to the monitoring, surveillance and review of Participants, including, but not limited to, the application of the CRRM and proposed [[Page 17484]] enhancements to the CRRM, as further discussed below. (i) Background DTC occupies an important role in the securities settlement system by, among other things, providing services for the settlement of book- entry transfer and pledge of interests in eligible deposited securities and net funds settlement, in connection with which Participants may incur net funds settlement obligations to DTC. DTC uses the CRRM, the Watch List and the enhanced surveillance to manage and monitor default risks of Participants on an ongoing basis, as discussed below. The level and frequency of such monitoring for a Participant is determined by the Participant's risk of default as assessed by DTC. Participants that are deemed by DTC to pose a heightened risk to DTC and its Participants are subject to closer and more frequent monitoring. Existing Credit Risk Rating Matrix Pursuant to the 2006 Rule Change, all Participants that are either U.S. broker-dealers or U.S. banks are assigned a rating generated solely based on quantitative factors by entering financial data of those Participants into an internally generated credit rating matrix, i.e., the CRRM.\6\ All other types of Participants are monitored by credit risk staff using financial criteria deemed relevant by DTC but would not be assigned a rating by the CRRM.\7\ --------------------------------------------------------------------------- \6\ See 2006 Rule Change, SR-DTC-2006-03, 71 FR 20428, which explained that the ratings assigned by the CRRM were generated using financial data extracted from standard regulatory reports of U.S. broker-dealers and banks. A small number of U.S. banks which submitted standard regulatory reports were not assigned a rating because they did not take deposits or make loans, and therefore the regulatory reports of these banks did not contain information on asset quality and/or liquidity, which was a data component used in the CRRM. Id. However, the 2006 Rule Change provided DTC with discretion to continue to ``evaluate the matrix methodology and its effectiveness and make such changes as it deems prudent and practicable within such time frames as it determines to be appropriate.'' Id. DTC has continued to evaluate the CRRM and has determined that the CRRM is the most effective method available to it to evaluate the default risk presented by any U.S. bank that submits regulatory reports, including a bank whose reports exclude certain data components as mentioned above. Accordingly, DTC applies the CRRM to assign ratings to any U.S. bank that submits regulatory reports, including those that were not covered by the CRRM in 2006, as reflected in the proposed rule change. \7\ In the 2006 Rule Change, DTC noted that these Participants would be monitored by credit risk staff by reviewing similar criteria as those reviewed for Participants included on the matrix but such review would occur outside of the matrix process. Id. --------------------------------------------------------------------------- The 2006 Rule Change explained that credit risk staff could downgrade a particular Participant's credit rating based on various qualitative factors. An example of such qualitative factors might be that the Participant in question received a qualified audit opinion on its annual audit. DTC noted in the 2006 Rule Change that in order to protect DTC and its other Participants, it was important that credit risk staff maintain the discretion to downgrade a Participant's credit rating on the CRRM and thus subject the Participant to closer monitoring. The current CRRM is comprised of two credit rating models--one for the U.S. broker-dealers and one for the U.S. banks--and generates credit ratings for the relevant Participants based on a 7-point rating system, with ``1'' being the strongest credit rating and ``7'' being the weakest credit rating. Over time, the current CRRM has not kept pace with DTC's evolving Participant membership base and heightened expectations from regulators and stakeholders for robustness of financial models. Specifically, the current CRRM only generates credit ratings for those Participants that are U.S. banks or U.S. broker-dealers that file standard reports with their regulators, which currently comprise 80% of Participants; foreign banks and trust companies currently account for 5% of Participants.\8\ The number of Participants that are foreign banks or trust companies increased from 12 in 2012 to 13 in 2017, and is expected to continue to grow over the coming years. Foreign banks and trust companies are typically large global financial institutions that have complex businesses and conduct a high volume of activities. Although foreign banks and trust companies are not currently rated by the CRRM, they are monitored by DTC's credit risk staff using financial criteria deemed relevant by DTC and can be placed on the Watch List if they experience a financial change that presents risk to DTC. Given the increase in the number of foreign bank Participants in recent years, there is a need to formalize DTC's credit risk evaluation process of the foreign bank or trust company Participants by assigning credit ratings to them in order to better facilitate the comparability of credit risks among Participants.\9\ --------------------------------------------------------------------------- \8\ As of March 16, 2017, there are 251 Participants, of which 50 (or 20%) are U.S. banks, 151 (or 60%) are U.S. broker-dealers and 13 (or 5%) are foreign banks or trust companies. \9\ DTC noted in the 2006 Rule Change that the CRRM is applied across DTC and its affiliated clearing agencies, NSCC and FICC. Specifically, in order to run the CRRM, credit risk staff uses the financial data of the applicable DTC Participants in addition to data of applicable members of NSCC and FICC. In this way, each applicable DTC Participant is rated against other applicable members of NSCC and FICC. See 2006 Rule Change, SR-DTC-2006-03, 71 FR 20428. --------------------------------------------------------------------------- As mentioned above, a Participant's credit rating is currently based solely upon quantitative factors. It is only after the CRRM has generated a credit rating with respect to a Participant that such Participant's credit rating may be downgraded manually by credit risk staff, after taking into consideration relevant qualitative factors. The inability of the current CRRM to take into account qualitative factors requires frequent and manual overrides by credit risk staff, which may result in inconsistent and/or incomplete credit ratings for Participants. Furthermore, the current CRRM uses a relative scoring approach and relies on peer grouping of Participants to calculate the credit rating of a Participant. This approach is not ideal because a Participant's credit rating can be affected by changes in its peer group even if the Participant's financial condition is unchanged. Proposed Credit Risk Rating Matrix Enhancements To improve the coverage and the effectiveness of the current CRRM, DTC is proposing three enhancements to the CRRM. The first proposed enhancement would expand the scope of CRRM coverage by enabling the CRRM to generate credit ratings for Participants that are foreign banks or trust companies and that have audited financial data that is publicly available. The second proposed enhancement would incorporate qualitative factors into the CRRM and therefore is expected to reduce the need and the frequency of manual overrides of Participant credit ratings. The third enhancement would replace the relative scoring approach currently used by CRRM with a statistical approach to estimate the absolute probability of default of each Participant. A. Enable the CRRM to Generate Credit Ratings for Foreign Bank or Trust Company Participants The current CRRM is comprised of two credit rating models--one for the U.S. broker-dealers and one for the U.S. banks. DTC is proposing to enhance the CRRM by adding an additional credit rating model for the foreign banks and trust companies. The additional model would expand the scope of Participants to which the CRRM would apply to include foreign banks and trust companies that have audited financial data that is publicly available. The CRRM credit rating of a foreign bank or trust company that is a Participant [[Page 17485]] would be based on quantitative factors, including size, capital, leverage, liquidity, profitability and growth, and qualitative factors, including market position and sustainability, information reporting and compliance, management quality, capital management and business/product diversity. By enabling the CRRM to generate credit ratings for these Participants, the enhanced CRRM would provide more comprehensive credit risk coverage of DTC's membership base. With the proposed enhancement to the CRRM as described above, applicable foreign bank or trust company Participants would be included in the CRRM process and be evaluated more effectively and efficiently because financial data with respect to these foreign bank or trust company Participants could be extracted from data sources in an automated form.\10\ --------------------------------------------------------------------------- \10\ In the 2006 Rule Change, DTC noted that these Participants would be monitored by credit risk staff by reviewing similar criteria as those reviewed for Participants included on the CRRM, but such review would occur outside of the CRRM process. Id. --------------------------------------------------------------------------- After the proposed enhancement, CRRM would be able to generate credit ratings on an ongoing basis for all Participants that are U.S. banks, U.S. brokers-dealers and foreign banks and trust companies, which together represent approximately 85% of Participants.\11\ --------------------------------------------------------------------------- \11\ As of March 16, 2017, there are 37 Participants that would not be rated by the enhanced CRRM, as proposed, because they are central securities depositories, securities exchanges, government sponsored entities, central counterparties, central banks and U.S. trust companies that do not file Call Reports (as defined below). --------------------------------------------------------------------------- B. Incorporate Qualitative Factors Into the CRRM In addition, as proposed, the enhanced CRRM would blend both qualitative factors and quantitative factors to produce a credit rating for each applicable Participant in relation to the Participant's credit risk. For U.S. and foreign banks and trust companies, the enhanced CRRM would use a 70/30 weighted split between quantitative and qualitative factors to generate credit ratings. For U.S. broker-dealers, the weight split between quantitative and qualitative factors would be 60/40. These weight splits have been chosen by DTC based on the industry best practice as well as research and sensitivity analysis conducted by DTC. DTC would review and adjust the weight splits as well as the quantitative and qualitative factors, as needed, based on recalibration of the CRRM to be conducted by DTC approximately every three to five years. Although there are advantages to measuring credit risk quantitatively, quantitative evaluation models alone are incapable of fully capturing all credit risks. Certain qualitative factors may indicate that a Participant is or will soon be undergoing financial distress, which may in turn signal a higher default exposure to DTC and its other Participants. As such, a key enhancement being proposed to the CRRM is the incorporation of relevant qualitative factors into each of the three credit rating models mentioned above. By including qualitative factors in the three credit rating models, the enhanced CRRM would capture risks that would otherwise not be accounted for with quantitative factors alone.\12\ Adding qualitative factors to the CRRM would not only enable it to generate more consistent and comprehensive credit ratings for applicable Participants, but it would also help reduce the need and frequency of manual credit rating overrides by the credit risk staff because overrides would likely only be required under more limited circumstances.\13\ --------------------------------------------------------------------------- \12\ The initial set of qualitative factors that would be incorporated into the CRRM includes (a) for U.S. broker dealers, market position and sustainability, management quality, capital management, liquidity management, geographic diversification, business/product diversity and access to funding, (b) for U.S. banks, environment, compliance/litigation, management quality, liquidity management and parental demands and (c) for foreign banks and trust companies, market position and sustainability, information reporting and compliance, management quality, capital management and business/product diversity. \13\ Once a Participant is assigned a credit rating, if circumstances warrant, credit risk staff would still have the ability to override the CRRM-issued credit rating by manually downgrading such rating as they do today. To ensure a conservative approach, the CRRM-issued credit ratings cannot be manually upgraded. --------------------------------------------------------------------------- C. Shifting From Relative Scoring to Absolute Scoring As proposed, the enhanced CRRM would use an absolute scoring approach and rank each Participant based on its individual probability of default rather than the relative scoring approach that is currently in use. This proposed change is designed to have a Participant's CRRM- generated credit rating reflect an absolute measure of the Participant's default risk and eliminate any potential distortion of a Participant's credit rating from the Participant's peer group that may occur under the relative scoring approach used in the existing CRRM. D. Watch List and Enhanced Surveillance In addition to the Watch List, DTC also maintains an enhanced surveillance list (referenced herein and in the proposed rule text as ``enhanced surveillance'') for membership monitoring. The enhanced surveillance list is generally used when Participants are undergoing drastic and unexpected changes in their financial conditions or operation capabilities and thus are deemed by DTC to be of the highest risk level and/or warrant additional scrutiny due to DTC's ongoing concerns about these Participants. Accordingly, Participants that are subject to enhanced surveillance are reported to DTC's management committees and are also regularly reviewed by a cross-functional team comprised of senior management of DTC. More often than not, Participants that are subject to enhanced surveillance are also on the Watch List. The group of Participants that is subject to enhanced surveillance is generally much smaller than the group on the Watch List. The enhanced surveillance list is an internal tool for DTC that triggers increased monitoring of a Participant above the monitoring that occurs when a Participant is on the Watch List. A Participant could be placed on the Watch List either based on its credit rating of 5, 6 or 7, which can either be generated by the CRRM or from a manual downgrade, or when DTC deems such placement as necessary to protect DTC and its Participants. In contrast, a Participant would be subject to enhanced surveillance only when close monitoring of the Participant is deemed necessary to protect DTC and its Participants. (ii) Detailed Description of the Proposed Rule Changes The 2006 Rule Change, while setting forth the procedures DTC follows with regard to the CRRM and the Watch List, did not incorporate these procedures into the text of the Rules. Pursuant to the proposed rule change, DTC would amend the Rules to incorporate the CRRM with the enhancements proposed above, including (1) the use of both quantitative and qualitative factors in generating credit ratings for CRRM-Rated Participants, (2) the expansion of the scope of CRRM coverage to enable the CRRM to generate credit ratings for Participants that are (a) U.S. banks that file the Consolidated Report of Condition and Income (``Call Report''), (b) U.S. broker-dealers that file the Financial and Operational Combined Uniform Single Report (``FOCUS [[Page 17486]] Report'') or the equivalent with their regulators, or (c) foreign banks or trust companies that have audited financial data that is publicly available and (3) that the CRRM would use an absolute scoring approach and rank each Participant based on its individual probability of default (rather than the relative scoring approach that is currently in use). Also, the proposed rule change would define the CRRM and the Watch List and add rule text to provide more transparency and clarity regarding DTC's current ongoing membership monitoring process. In this regard, the proposed rule change would (i) add proposed definitions for CRRM and Watch List to Rule 1 (Definitions) and (ii) amend Rule 2 (Participants and Pledgees) (A) Section 1 to clarify a provision relating to the types of information a Participant must provide to DTC upon DTC's request for the Participant to demonstrate its satisfactory financial condition and operational capability, including its risk management practices with respect to services of DTC utilized by the Participant for another Person or Persons and (B) to add a new Section 10 to include provisions relating to the monitoring, surveillance and review of Participants, including, but not limited to, the application of the CRRM and proposed enhancements to the CRRM, as further discussed below. A. Proposed Changes to Rule 1 (Definitions) The proposed rule change would amend Rule 1 to add definitions for the CRRM and the Watch List. The proposed definition of the CRRM would provide that the term ``Credit Risk Rating Matrix'' means a matrix of credit ratings of Participants as specified in the proposed new Section 10(a) of Rule 2. As proposed, the definition would state that the CRRM is developed by DTC to evaluate the credit risk such Participants pose to DTC and its Participants and is based on factors determined to be relevant by DTC from time to time, which factors are designed to collectively reflect the financial and operational condition of a Participant. The proposed definition would also state that these factors include (i) quantitative factors, such as capital, assets, earnings and liquidity and (ii) qualitative factors, such as management quality, market position/ environment and capital and liquidity risk management. The proposed definition of the Watch List would provide that the term ``Watch List'' means, at any time and from time to time, the list of Participants whose credit ratings derived from the CRRM are 5, 6 or 7, as well as Participants that, based on DTC's consideration of relevant factors, including those that would be set forth in the proposed new Section 10 of Rule 2 (described below), are deemed by DTC to pose a heightened risk to DTC and its Participants. B. Proposed Changes to Section 1 of Rule 2 (Participants and Pledgees) Section 1 of Rule 2 provides, among other things, that upon the request of DTC, a Participant shall furnish to DTC information sufficient to demonstrate its satisfactory financial condition and operational capability. The proposed rule change would, by way of example, clarify that the types of information that DTC may require in this regard include, but are not limited to, such information as DTC may request regarding the businesses and operations of the Participant and its risk management practices with respect to services of DTC utilized by the Participant for another Person. C. Proposed New Section 10 of Rule 2 The proposed rule change would add a new Section 10 of Rule 2 to include provisions relating to the monitoring, surveillance and review of Participants, including, but not limited to, the application of, and the proposed enhancements to, the CRRM. In this regard, the proposed new Section 10 of Rule 2 would provide that: (1) All Participants would be monitored and reviewed by DTC on an ongoing and periodic basis, which may include monitoring of news and market developments and review of financial reports and other public information. (2)(i) A Participant that is (A) qualified to be a Participant pursuant to (x) Rule 3, Section 1(d) and files the Call Report (i.e., a U.S. Bank) or (y) Rule 3, Section 1(h)(ii) and files the FOCUS Report or the equivalent with its regulator (i.e., a U.S. broker-dealer) or (B) a foreign bank or trust company qualified to be a Participant pursuant to Section 2 of the Policy Statement on the Admission of Participants and that has audited financial data that is publicly available, would be assigned a credit rating by DTC in accordance with the CRRM. The proposed rule change would also provide that a Participant's credit rating will be reassessed each time the Participant provides DTC with requested information pursuant to Section 1 of Rule 2, or as may be otherwise required under the Rules and Procedures \14\ (including proposed new Section 10 of Rule 2). --------------------------------------------------------------------------- \14\ Pursuant to Section 1 of Rule 1, the term ``Procedures'' means the Procedures, service guides, and regulations of DTC adopted pursuant to Rule 27, as amended from time to time. Rules, supra note 4. --------------------------------------------------------------------------- (ii) Because the factors used as part of the CRRM may not identify all risks that a CRRM-Rated Participant may present to DTC, DTC may, in its discretion, override the CRRM-Rated Participant's credit rating derived from the CRRM to downgrade that Participant. In this regard, the proposed rule change would provide that (A) such a downgrading may result in the Participant being placed on the Watch List, and/or it may subject the Participant to enhanced surveillance based on relevant factors, including those described in paragraph (4) below and (B) DTC may also take such additional actions with regard to the Participant as are permitted by the Rules and Procedures. (3) Participants other than CRRM-Rated Participants would not be assigned a credit rating by the CRRM but may be placed on the Watch List and/or may be subject to enhanced surveillance based on relevant factors, including those described in paragraph (4) below, as DTC deems necessary to protect it and its Participants. (4) The factors to be considered by DTC as proposed in paragraphs (2)(ii) and (3) above would include, but would not be not limited to, (i) news reports and/or regulatory observations that raise reasonable concerns relating to the Participant, (ii) reasonable concerns around the Participant's liquidity arrangements, (iii) material changes to the Participant's organizational structure, (iv) reasonable concerns of DTC about the Participant's financial stability due to particular facts and circumstances, such as material litigation or other legal and/or regulatory risks, (v) failure of the Participant to demonstrate satisfactory financial condition or operational capability or if DTC has a reasonable concern regarding the Participant's ability to maintain applicable participation standards and (vi) failure of the Participant to provide information required by DTC to assess risk exposure posed by the Participant's activity (including information requested by DTC pursuant to Section 1 of Rule 2). (5) A Participant being subject to enhanced surveillance or being placed on the Watch List would result in more thorough monitoring of the Participant's financial condition and/or operational capability, which could include, for example, on-site visits or additional due diligence information requests from [[Page 17487]] DTC. In this regard, the proposed rule change would provide that DTC may require a Participant placed on the Watch List and/or subject to enhanced surveillance to make more frequent financial disclosures, including, without limitation, interim and/or pro forma reports. The proposed rule change would also provide that Participants that are subject to enhanced surveillance would also be reported to DTC's management committees and regularly reviewed by a cross-functional team comprised of senior management of DTC. The proposed rule change would further provide that DTC may also take such additional actions with regard to any Participant (including a Participant placed on the Watch List and/or subject to enhanced surveillance) as are permitted by the Rules and Procedures. Implementation Timeframe Pending Commission approval, DTC expects to implement this proposal promptly. Participants would be advised of the implementation date of this proposal through issuance of a DTC Important Notice. 2. Statutory Basis Section 17A(b)(3)(F) of the Act requires that the Rules be designed to promote the prompt and accurate clearance and settlement of securities transactions and to assure the safeguarding of securities and funds which are in the custody or control of DTC or for which it is responsible.\15\ --------------------------------------------------------------------------- \15\ 15 U.S.C. 78q-1(b)(3)(F). --------------------------------------------------------------------------- By enhancing the CRRM to enable it to assign credit ratings to Participants that are foreign banks or trust companies and that have audited financial data that is publicly available, DTC believes that the proposed rule change is consistent with Section 17A(b)(3)(F) of the Act. This is because the proposed rule change expands the CRRM's applicability to a wider group of Participants, which further improves DTC's membership monitoring process and better enables DTC to safeguard the securities and funds which are in its custody or control or for which it is responsible in furtherance of the Act. Similarly, by enhancing the CRRM to enable it to incorporate qualitative factors when assigning a Participant's credit rating, DTC believes that this proposed rule change is consistent with Section 17A(b)(3)(F) of the Act. This is because the proposed rule change would enable DTC to take into account relevant qualitative factors in an automated and more effective manner when monitoring the credit risks presented by Participants, thus improving DTC's membership monitoring process overall, which would in turn better enable DTC to safeguard the securities and funds which are in its custody or control or for which it is responsible in furtherance of the Act. Likewise, by enhancing the CRRM to shift from a relative scoring approach to an absolute scoring approach when assigning a Participant's credit rating, DTC believes that this proposed rule change is consistent with Section 17A(b)(3)(F) of the Act. This is because the proposed rule change would enable DTC to generate credit ratings for Participants that are more reflective of the Participants' default risk, thus improving DTC's membership monitoring process overall, which would in turn better enable DTC to safeguard the securities and funds which are in its custody or control or for which it is responsible in furtherance of the Act. By providing specificity, clarity and additional transparency to the Rules related to DTC's current ongoing membership monitoring process, DTC believes that the proposed rule changes to (1) Rule 1 to add the definitions of CRRM and Watch List, (2) Section 1 of Rule 2 to clarify a provision relating to the types of information a Participant must provide to DTC upon DTC's request for the Participant to demonstrate its satisfactory financial condition and operational capability and (3) add Section 10 of Rule 2 to include provisions relating to the monitoring, surveillance and review of Participants, including, but not limited to, the application of the CRRM and proposed enhancements thereto, are consistent with Section 17A(b)(3)(F) of the Act because the proposed rule changes would help ensure that the Rules remain accurate and clear. Collectively, the proposed changes would help ensure that the Rules are more transparent, accurate and clear, which would help enable all stakeholders to readily understand their respective rights and obligations with DTC's clearance and settlement of securities transactions. Therefore, DTC believes that the proposed rule changes would promote the prompt and accurate clearance and settlement of securities transactions, consistent with Section 17A(b)(3)(F) of the Act. The proposed enhancements to the CRRM are consistent with Rule 17Ad-22(e)(3)(i) under the Act, which was recently adopted by the Commission.\16\ Rule 17Ad-22(e)(3)(i) will require DTC to establish, implement, maintain and enforce written policies and procedures reasonably designed to maintain a sound risk management framework for comprehensively managing risks that arise in or are born by DTC, which includes . . . systems designed to identify, measure, monitor and manage the range of risks that arise in or are borne by DTC.\17\ The proposed enhancements to the CRRM have been designed to assist DTC in identifying, measuring, monitoring and managing the credit risks to DTC posed by its Participants. The proposed enhancements to the CRRM accomplish this by (i) expanding the CRRM's applicability to a wider group of Participants to include Participants that are foreign banks or trust companies, (ii) enabling the CRRM to take into account relevant qualitative factors in an automated and more effective manner when monitoring the credit risks presented by Participants and (iii) enabling the CRRM to generate credit ratings for Participants that are more reflective of the Participants' default risk by shifting to an absolute scoring approach, all of which would improve DTC's membership monitoring process overall. Therefore, DTC believes the proposed enhancements to the CRRM would assist DTC in identifying, measuring, monitoring and managing risks that arise in or are born by DTC, consistent with the requirements of Rule 17Ad-22(e)(3)(i). --------------------------------------------------------------------------- \16\ 17 CFR 240.17Ad-22(e)(3)(i). The Commission adopted amendments to Rule 17Ad-22, including the addition of new subsection 17Ad-22(e), on September 28, 2016. See Securities Exchange Act Release No. 78961 (September 28, 2016), 81 FR 70786 (October 13, 2016) (S7-03-14). DTC is a ``covered clearing agency'' as defined by the new Rule 17Ad-22(a)(5) and must comply with new subsection (e) of Rule 17Ad-22 by April 11, 2017. Id. \17\ Id. --------------------------------------------------------------------------- The proposed rule change to Section 1 of Rule 2 with respect to the scope of information that may be requested by DTC from its Participants has been designed to be consistent with Rule 17Ad-22(e)(19) under the Act, which was recently adopted by the Commission.\18\ Rule 17Ad- 22(e)(19) will require DTC to establish, implement, maintain and enforce written policies and procedures reasonably designed to identify, monitor, and manage the material risk to DTC arising from arrangements in which firms that are indirect participants in DTC rely on the services provided by Participants to access DTC's payment, clearing, or settlement facilities.\19\ By expressly reflecting in [[Page 17488]] the Rules what is already DTC's current practice associated with its request for information sufficient to demonstrate a Participant's satisfactory financial condition and operational capability to state that such request may include information regarding the businesses and operations of the Participant, as well as its risk management practices with respect to services of DTC utilized by the Participant for another Person, this proposed rule change would help enable DTC to have rule provisions that are reasonably designed to identify, monitor and manage the material risks to DTC arising from tiered participation arrangements consistent with Rule 17Ad-22(e)(19). --------------------------------------------------------------------------- \18\ 17 CFR 240.17Ad-22(e)(19). Id. \19\ Id. --------------------------------------------------------------------------- (B) Clearing Agency's Statement on Burden on Competition DTC does not believe that the proposed rule change to (i) enable the CRRM to generate credit ratings for Participants that are foreign banks or trust companies, (ii) incorporate qualitative factors into the CRRM and (iii) shift to an absolute scoring approach would impose any burden on competition that is not necessary or appropriate in furtherance of the Act.\20\ These proposed enhancements to the CRRM would improve DTC's Participant credit risk evaluation process by (1) expanding the CRRM's credit rating capability and thereby providing more comprehensive credit risk coverage of Participants, (2) enabling the CRRM to generate more consistent and comprehensive credit ratings for Participants and thereby reducing the need and frequency for manual downgrades and (3) enabling the CRRM to generate credit ratings for Participants that are more reflective of the Participants' default risk. However, DTC recognizes that any change to its Participant credit risk evaluation process, such as the proposed rule change, may impose a burden on competition in terms of potential impact on Participants' credit ratings. Nevertheless, DTC believes that any burden on competition derived from the proposed rule change would be necessary and appropriate in furtherance of the Act because the proposed enhancements to the CRRM would help improve DTC's membership monitoring process and thus better enable DTC to safeguard the securities and funds which are in its custody or control or for which it is responsible. Furthermore, the proposed enhancements to the CRRM would also assist DTC in identifying, measuring, monitoring and managing risks that arise in or are born by DTC. As such, DTC does not believe the proposed enhancements to the CRRM would impose any burden on competition that is not necessary or appropriate in furtherance of the Act. --------------------------------------------------------------------------- \20\ 15 U.S.C. 78q-1(b)(3)(I). --------------------------------------------------------------------------- DTC does not believe that the proposed rule changes to (i) add proposed definitions for CRRM and Watch List to Rule 1 and (ii) amend Rule 2 to (A) clarify a provision relating to the types of information a Participant must provide to DTC upon DTC's request for the Participant to demonstrate its satisfactory financial condition and operational capability and (B) add provisions relating to the monitoring, surveillance and review of Participants that may operate separately or in conjunction with DTC's application of the CRRM, would have any impact on competition because each of such proposed rule changes is designed to provide additional specificity, clarity and transparency in the Rules regarding DTC's current ongoing membership monitoring process by expressly providing in the Rules DTC's current practices with respect to such process. As such, these proposed rule changes would not impact Participants or impose any burden on competition. (C) Clearing Agency's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments relating to this proposed rule change have not been solicited or received. 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 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 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. 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 CommentsUse 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-2017-002 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-2017-002. 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-2017-002 and should be submitted on or before May 2, 2017. --------------------------------------------------------------------------- \21\ 17 CFR 200.30-3(a)(12). [[Page 17489]] --------------------------------------------------------------------------- For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\21\ Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017-07181 Filed 4-10-17; 8:45 am] BILLING CODE 8011-01-P
![Federal Register / Vol. 82, No. 68 / Tuesday, April 11, 2017 / Notices 17483
deposit procedures for in-kind the policies of each registered filing,5 developed by DTC to assign a
purchases of Creation Units and the investment company involved; and (c) credit rating to certain Participants
redemption procedures for in-kind the proposed transaction is consistent (‘‘CRRM-Rated Participants’’) by
redemptions of Creation Units will be with the general purposes of the Act. evaluating the risks posed by CRRM-
the same for all purchases and For the Commission, by the Division of Rated Participants to DTC and its
redemptions and Deposit Instruments Investment Management, under delegated Participants from providing services to
and Redemption Instruments will be authority. these CRRM-Rated Participants and (ii)
valued in the same manner as those Eduardo A. Aleman, make other amendments to the Rules to
Portfolio Instruments currently held by Assistant Secretary. provide more transparency and clarity
the Funds. Applicants also seek relief [FR Doc. 2017–07173 Filed 4–10–17; 8:45 am] regarding DTC’s current ongoing
from the prohibitions on affiliated membership monitoring process.
BILLING CODE 8011–01–P
transactions in section 17(a) to permit a
Fund to sell its shares to and redeem its II. Clearing Agency’s Statement of the
shares from a Fund of Funds, and to Purpose of, and Statutory Basis for, the
SECURITIES AND EXCHANGE Proposed Rule Change
engage in the accompanying in-kind COMMISSION
transactions with the Fund of Funds.2 In its filing with the Commission, the
The purchase of Creation Units by a [Release No. 34–80382; File No. SR–DTC– clearing agency included statements
Fund of Funds directly from a Fund will 2017–002] concerning the purpose of and basis for
be accomplished in accordance with the the proposed rule change and discussed
Self-Regulatory Organizations; The any comments it received on the
policies of the Fund of Funds and will
Depository Trust Company; Notice of proposed rule change. The text of these
be based on the NAVs of the Funds.
9. Applicants also request relief to Filing of Proposed Rule Change To statements may be examined at the
permit a Feeder Fund to acquire shares Address and Update Practices and places specified in Item IV below. The
of another registered investment Policies With Respect to the Credit clearing agency has prepared
company managed by the Adviser Risk Rating Matrix and Make Other summaries, set forth in sections A, B,
having substantially the same Changes and C below, of the most significant
investment objectives as the Feeder April 5, 2017. aspects of such statements.
Fund (‘‘Master Fund’’) beyond the Pursuant to Section 19(b)(1) of the
limitations in section 12(d)(1)(A) and (A) Clearing Agency’s Statement of the
Securities Exchange Act of 1934 Purpose of, and Statutory Basis for, the
permit the Master Fund, and any (‘‘Act’’),1 and Rule 19b–4 thereunder,2
principal underwriter for the Master Proposed Rule Change
notice is hereby given that on March 22,
Fund, to sell shares of the Master Fund 2017, The Depository Trust Company 1. Purpose
to the Feeder Fund beyond the (‘‘DTC’’) filed with the Securities and The proposed rule change would
limitations in section 12(d)(1)(B). Exchange Commission (‘‘Commission’’) amend Rules 1 and 2 in order to (i)
10. Section 6(c) of the Act permits the the proposed rule change as described address and update DTC’s practices and
Commission to exempt any persons or in Items I, II and III below, which Items policies with respect to the CRRM and
transactions from any provision of the have been prepared by the clearing
Act if such exemption is necessary or (ii) provide more transparency and
agency.3 The Commission is publishing clarity regarding DTC’s current
appropriate in the public interest and
this notice to solicit comments on the membership monitoring process. In this
consistent with the protection of
proposed rule change from interested regard, the proposed rule change would
investors and the purposes fairly
persons. (i) add proposed definitions for the
intended by the policy and provisions of
the Act. Section 12(d)(1)(J) of the Act I. Clearing Agency’s Statement of the terms ‘‘Credit Risk Rating Matrix’’ and
provides that the Commission may Terms of Substance of the Proposed ‘‘Watch List’’ to Rule 1 (Definitions), as
exempt any person, security, or Rule Change discussed below and (ii) amend Rule 2
transaction, or any class or classes of (Participants and Pledgees) to (A) clarify
The proposed rule change consists of a provision in Section 1 relating to the
persons, securities, or transactions, from amendments to DTC’s Rules, By-Laws
any provision of section 12(d)(1) if the types of information a Participant must
and Organization Certificate (‘‘Rules’’).4 provide to DTC upon DTC’s request for
exemption is consistent with the public The proposed rule change would amend
interest and the protection of investors. the Participant to demonstrate its
Rules 1 and 2 in order to (i) address and satisfactory financial condition and
Section 17(b) of the Act authorizes the update DTC’s practices and policies
Commission to grant an order operational capability, including its risk
with respect to the existing matrix management practices with respect to
permitting a transaction otherwise (hereinafter referred to as the ‘‘Credit
prohibited by section 17(a) if it finds services of DTC utilized by the
Risk Rating Matrix’’ or ‘‘CRRM’’), which Participant for another Person and (B)
that (a) the terms of the proposed was, as described in an earlier DTC rule
transaction are fair and reasonable and add a new Section 10 to include
do not involve overreaching on the part provisions relating to the monitoring,
1 15 U.S.C. 78s(b)(1).
of any person concerned; (b) the 2 17
surveillance and review of Participants,
CFR 240.19b–4.
proposed transaction is consistent with 3 On March 22, 2017, DTC filed this proposed
including, but not limited to, the
rule change as an advance notice (SR–DTC–2017– application of the CRRM and proposed
2 The requested relief would apply to direct sales 801) with the Commission pursuant to Section
of shares in Creation Units by a Fund to a Fund of 806(e)(1) of Title VIII of the Dodd-Frank Wall Street 5 See Securities Exchange Act Release No. 53655
srobinson on DSK5SPTVN1PROD with NOTICES
Funds and redemptions of those shares. Applicants, Reform and Consumer Protection Act entitled the (April 14, 2006), 71 FR 20428 (April 20, 2006) (SR–
moreover, are not seeking relief from section 17(a) Payment, Clearing, and Settlement Supervision Act DTC–2006–03) (order of the Commission)
for, and the requested relief will not apply to, of 2010, 12 U.S.C. 5465(e)(1), and Rule 19b– approving a proposed rule change (‘‘2006 Rule
transactions where a Fund could be deemed an 4(n)(1)(i) of the Act, 17 CFR 240.19b–4(n)(1)(i). A Change’’) of DTC to amend the criteria used by DTC
Affiliated Person, or a Second-Tier Affiliate, of a copy of the advance notice is available at http:// to place Participants on surveillance status,
Fund of Funds because an Adviser or an entity www.dtcc.com/legal/sec-rule-filings.aspx. including, but not limited to DTC’s application of
controlling, controlled by or under common control 4 Capitalized terms not defined herein are defined the CRRM and the placement of lower rated CRRM-
with an Adviser provides investment advisory in the Rules, available at www.dtcc.com/∼/media/ Rated Participants on an internal list in order to be
services to that Fund of Funds. Files/Downloads/legal/rules/dtc_rules.pdf. monitored more closely (‘‘Watch List’’).
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![Federal Register / Vol. 82, No. 68 / Tuesday, April 11, 2017 / Notices 17489
For the Commission, by the Division of Diversity Assessment Report’’ in the draft.pdf. The SEC estimates that use of
Trading and Markets, pursuant to delegated subject line of the message. the Diversity Assessment Report would
authority.21 reduce the average response time for
FOR FURTHER INFORMATION CONTACT:
Eduardo A. Aleman, Pamela A. Gibbs, Director, Office of this collection per respondent from 12
Assistant Secretary. Minority and Women Inclusion, (202) hours to 10 hours.
[FR Doc. 2017–07181 Filed 4–10–17; 8:45 am] 551–6046, or Audrey B. Little, Senior The SEC may use the information
BILLING CODE 8011–01–P Counsel, Office of Minority and Women submitted by the entities it regulates to
Inclusion, (202) 551–6086, Securities monitor progress and trends in the
and Exchange Commission, 100 F financial services industry with regard
SECURITIES AND EXCHANGE Street, NE., Washington, DC 20549. to diversity and inclusion in
COMMISSION employment and contracting activities
SUPPLEMENTARY INFORMATION: Under the
and to identify and highlight those
Submission for OMB Review: PRA (44 U.S.C. 3501–3520), certain
policies and practices that have been
Comment Request Federal agencies must obtain approval
successful. The SEC will continue to
from OMB for each collection of
Upon Written Request, Copies Available reach out to the regulated entities and
information that they conduct or
From: U.S. Securities and Exchange other interested parties to discuss
sponsor. ‘‘Collection of information’’ is
Commission, Office of FOIA Services, diversity and inclusion in the financial
defined in 44 U.S.C. 3502(3) (and 5 CFR
100 F Street NE, Washington, DC services industry and share leading
1320.3(c) of the PRA implementing
20549–2736 practices. The SEC may also publish
regulations) to include agency requests
information disclosed by the entity,
Revision: or requirements that members of the
such as any identified leading practices,
Joint Standards for Assessing the Diversity public submit reports, keep records, or
in any form that does not identify a
Policies and Practices of Entities provide information to a third party.
Regulated by the Agencies, SEC File No. particular institution or disclose
The PRA (44 U.S.C. 3506(c)(2)(A))
270–664, OMB Control No. 3235–0740. confidential business information. The
directs these Federal agencies to publish
ACTION: Notice. SEC will not publish diversity and
a 30-day notice in the Federal Register
inclusion information that identifies any
concerning each proposed collection of
SUMMARY: The Securities and Exchange particular regulated entity unless the
information before submitting the
Commission (the SEC) has submitted a regulated entity consents in writing to
collection to OMB for approval. To
revision to a currently approved such use.
comply with this requirement, the SEC Type of Review: Revision.
information collection to the Office of is publishing this notice to invite public
Management and Budget (OMB) for Frequency of Response: Annually.
comment on the proposed revision to Burden Estimates:
review and approval in accordance with the currently approved information
the Paperwork Reduction Act of 1995 Revised Number of Respondents:
collection discussed below. 1,300.2
(PRA). The SEC previously received Title of Collection: Joint Standards for Revised Average Response Time Per
OMB approval for a collection of Assessing Diversity Policies and Respondent: 10 hours.
information associated with the Final Practices of Entities Regulated by the Revised Total Annual Burden Hours:
Interagency Policy Statement Agencies. 13,000.
Establishing Joint Standards for OMB Control Number: 3235–0740. Obligation to Respond: Voluntary.
Assessing the Diversity Policies and Description: The SEC previously Comments: On January 24, 2017, the
Practices of Entities Regulated by the received OMB approval for a voluntary SEC published a notice of its proposed
Agencies (Joint Standards). The revision information collection associated with revision to the currently approved
adds a form entitled ‘‘Diversity the Joint Standards, pursuant to which information collection associated with
Assessment Report Assessment Report entities regulated by the SEC may the Joint Standards, and allowed the
for Entities Regulated by the SEC’’ conduct voluntarily self-assessments of public 60 days to submit comments.3
(Diversity Assessment Report) to their diversity policies and practices See 82 FR 8248. The comment period
facilitate the collection of information and provide information to pertaining to closed March 27, 2017, and the SEC
contemplated under the Joint Standards. the self-assessments to the SEC.1 This received no comments that addressed
DATES: Comments must be submitted on proposed revision to the currently the proposed revision to the information
or before May 11, 2017. approved collection adds a form entitled collection.
ADDRESSES: The public may review the ‘‘Diversity Assessment Report for Written comments continue to be
background documentation for this Entities Regulated by the SEC’’ invited on: (a) whether the collection of
information collection at the following (Diversity Assessment Report) to assist information is necessary for the proper
Web site: www.reginfo.gov. Comments with collection of information regarding performance of the functions of the SEC,
should be directed to: (i) Desk Officer regulated entities’ policies and practices including whether the information has
for the Securities and Exchange relating to diversity and inclusion. The practical utility; (b) the accuracy of the
Commission, Office of Information and Diversity Assessment Report (1) asks for SEC’s estimate of the information
Regulatory Affairs, Office of general information about a respondent; collection burden, including the validity
Management and Budget, Room 10102, (2) includes questions relating to the of the methods and the assumptions
New Executive Office Building, standards set forth in the Joint used; (c) ways to enhance the quality,
Washington, DC 20503, or by sending an Standards; (3) seeks data related to utility, and clarity of the information
email to: Shagufta_Ahmed@ workforce diversity and supplier proposed to be collected; (d) ways to
srobinson on DSK5SPTVN1PROD with NOTICES
omb.eop.gov; and (ii) Pamela C. Dyson, diversity; and (4) provides an minimize the burden of the collection
Chief Information Officer, Securities opportunity for comments. A draft of
and Exchange Commission, c/o Remi this Diversity Assessment Report can be 2 This number has been modified to account for
Pavlik-Simon, 100 F Street NE., the ever changing number of entities regulated by
viewed at https://www.sec.gov/omwi/ the SEC. It still, however, represents about 5% of
Washington, DC 20549 or send an email sec-entity-diversity-assessment-report- regulated entities, as set forth in the original PRA
to: PRA_Mailbox@sec.gov, and include notice for the Joint Standards.
‘‘SEC File No. 270–664—OMWI 1 80 FR 33016 (June 10, 2015). 3 82 FR 8248.
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Document Created: 2017-04-11 00:48:55
Document Modified: 2017-04-11 00:48:55
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Notices | |
| FR Citation | 82 FR 17483 |
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