83 FR 34246 - Self-Regulatory Organizations; The Depository Trust Company; Notice of Filing of Amendment No. 1 to a Proposed Rule Change To Amend the Loss Allocation Rules and Make Other Changes
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 83, Issue 139 (July 19, 2018)
Federal Register Volume 83, Issue 139 (July 19, 2018)
| Page Range | 34246-34263 | |
| FR Document | 2018-15364 |
[Federal Register Volume 83, Number 139 (Thursday, July 19, 2018)] [Notices] [Pages 34246-34263] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2018-15364] [[Page 34246]] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-83629; File No. SR-DTC-2017-022] Self-Regulatory Organizations; The Depository Trust Company; Notice of Filing of Amendment No. 1 to a Proposed Rule Change To Amend the Loss Allocation Rules and Make Other Changes July 13, 2018. On December 18, 2017, The Depository Trust Company (``DTC'') filed with the Securities and Exchange Commission (``Commission''), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') and Rule 19b-4 thereunder, proposed rule change SR-DTC-2017-022 (``Proposed Rule Change'') to amend the loss allocation rules and make other changes; the Proposed Rule Change was published for comment in the Federal Register on January 8, 2018.\1\ On February 8, 2018, the Commission designated a longer period within which to approve, disapprove, or institute proceedings to determine whether to approve or disapprove the Proposed Rule Change.\2\ On March 20, 2018, the Commission instituted proceedings to determine whether to approve or disapprove the Proposed Rule Change; on June 25, 2018, the Commission designated a longer period for Commission action on the proceedings to determine whether to approve or disapprove the Proposed Rule Change.\3\ On June 28, 2018, DTC filed Amendment No. 1 to the Proposed Rule Change to amend and replace in its entirety the Proposed Rule Change as originally submitted on December 18, 2017.\4\ As of the date of this release, the Commission has not received any comments on the Proposed Rule Change. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4, respectively. Securities Exchange Act Release No. 82426 (January 2, 2018), 83 FR 913 (January 8, 2018) (SR-DTC-2017-022). On December 18, 2017, DTC filed the Proposed Rule Change as advance notice SR-DTC-2017-804 (``Advance Notice'') 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 (``Clearing Supervision Act'') and Rule 19b-4(n)(1)(i) of the Act. (12 U.S.C. 5465(e)(1) and 17 CFR 240.19b-4(n)(1)(i), respectively.) On January 30, 2018, the Commission published in the Federal Register notice of filing of the Advance Notice. The notice also extended the review period for the Advance Notice pursuant to Section 806(e)(1)(H) of the Clearing Supervision Act. (12 U.S.C. 5465(e)(1)(H).) See Securities Exchange Act Release No. 82582 (January 24, 2018), 83 FR 4297 (January 30, 2018) (SR-DTC-2017-804). On April 10, 2018, the Commission required additional information for consideration of the Advance Notice, pursuant to Section 806(e)(1)(D) of the Clearing Supervision Act, which provided the Commission with an additional 60-days in the review period beginning on the date that the information requested is received by the Commission. (12 U.S.C. 5465(e)(1)(D).) See Memorandum from the Office of Clearance and Settlement Supervision, Division of Trading and Markets, titled ``Commission's Request for Additional Information,'' available at http://www.sec.gov/rules/sro/dtc-an.shtml. On June 28, 2018, DTC filed Amendment No. 1 to the Advance Notice. To promote the public availability and transparency of its post-notice amendment, DTC submitted a copy of Amendment No. 1 through the Commission's electronic public comment letter mechanism. Accordingly, Amendment No. 1 to the Advance Notice has been posted on the Commission's website at https://www.sec.gov/rules/sro/dtc-an.htm and thus been publicly available since June 29, 2018. On July 6, 2018, the Commission received the information requested, which added an additional 60-days to the review period pursuant to Sections 806(e)(1)(E) and (G) of the Clearing Supervision Act. (12 U.S.C. 5465(e)(1)(E) and (G).) See Memorandum from the Office of Clearance and Settlement Supervision, Division of Trading and Markets, titled ``Response to the Commission's Request for Additional Information,'' available at http://www.sec.gov/rules/sro/dtc-an.shtml. The proposal, as set forth in both the Advance Notice and the Proposed Rule Change, shall not take effect until all required regulatory actions are completed. \2\ Securities Exchange Act Release No. 82670 (February 8, 2018), 83 FR 6626 (February 14, 2018) (SR-DTC-2017-022; SR-FICC- 2017-022; SR-NSCC-2017-018). \3\ Securities Exchange Act Release No. 82914 (March 20, 2018), 83 FR 12978 (March 26, 2018) (SR-DTC-2017-022); Securities Exchange Act Release No. 83510 (June 25, 2018), 83 FR 30791 (June 29, 2018) (SR-DTC-2017-022; SR-FICC-2017-022; SR-NSCC-2017-018). \4\ To promote the public availability and transparency of its post-notice amendment, DTC submitted a copy of Amendment No. 1 through the Commission's electronic public comment letter mechanism. Accordingly, Amendment No. 1 to the Proposed Rule Change has been posted on the Commission's website at https://www.sec.gov/rules/sro/dtc.htm and thus been publicly available since June 29, 2018. --------------------------------------------------------------------------- The Proposed Rule Change, as amended by Amendment No. 1, is described in Items I and II below, which Items have been prepared by DTC. The Commission is publishing this notice to solicit comments on the Proposed Rule Change, as amended by Amendment No. 1, from interested persons. I. Clearing Agency's Statement of the Terms of Substance of the Proposed Rule Change The proposed rule change would revise Rule 4 (Participants Fund and Participants Investment) to (i) provide separate sections for (x) the use of the Participants Fund \5\ as a liquidity resource for settlement and (y) loss allocation among Participants of losses and liabilities arising out of Participant defaults or due to non-default events; and (ii) enhance the resiliency of DTC's loss allocation process so that DTC can take timely action to contain multiple loss events that occur in succession during a short period of time. In connection therewith, the proposed rule change would (i) align the loss allocation rules of the three clearing agencies of The Depository Trust & Clearing Corporation (``DTCC''), namely DTC, National Securities Clearing Corporation (``NSCC''), and Fixed Income Clearing Corporation (``FICC'') (collectively, the ``DTCC Clearing Agencies''), so as to provide consistent treatment, to the extent practicable and appropriate, especially for firms that are participants of two or more DTCC Clearing Agencies, (ii) increase transparency and accessibility of the provisions relating to the use of the Participants Fund as a liquidity resource for settlement and the loss allocation provisions, by enhancing their readability and clarity, (iii) require a defined corporate contribution to losses and liabilities that are incurred by DTC prior to any allocation among Participants, whether such losses and liabilities arise out of Participant defaults or due to non-default events, (iv) reduce the time within which DTC is required to return a former Participant's Actual Participants Fund Deposit, and (v) make conforming and technical changes. In addition, the proposed rule change would amend Section 6 of Rule 4 to clarify the requirements for a Participant that wants to voluntarily terminate its business with DTC, and to align, where appropriate, with the proposed voluntary termination provisions of the NSCC and FICC rules. The proposed rule change would also amend Rule 1 (Definitions; Governing Law) to add cross-references to terms that would be defined in proposed Rule 4, and would amend Rule 2 (Participants and Pledgees), in relevant part, to align with proposed Section 6 of Rule 4, as discussed below. --------------------------------------------------------------------------- \5\ Each capitalized term not otherwise defined herein has its respective meaning as set forth in the Rules, By-Laws and Organization Certificate of DTC (``Rules''), available at http://www.dtcc.com/legal/rules-and-procedures.aspx. --------------------------------------------------------------------------- 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 III below. The clearing agency has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. [[Page 34247]] (A) Clearing Agency's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose Description of the Amendment This filing constitutes Amendment No. 1 (``Amendment'') to rule filing SR-DTC-2017-022 (``Rule Filing'') previously filed by DTC on December 18, 2017.\6\ This Amendment amends and replaces the Rule Filing in its entirety. DTC submits this Amendment in order to further clarify the operation of the proposed rule changes on loss allocation by providing additional information and examples. This Amendment would also clarify the requirements for a Participant that wants to voluntarily terminate its business with DTC. In particular, this Amendment would: --------------------------------------------------------------------------- \6\ See Securities Exchange Act Release No. 82426 (January 2, 2018), 83 FR 913 (January 8, 2018) (SR-DTC-2017-022). --------------------------------------------------------------------------- (i) Clarify that the term ``Participant Default,'' referring to the failure of a Participant to satisfy any obligation to DTC, includes the failure of a Defaulting Participant to satisfy its obligations as provided in Rule 9(B).\7\ --------------------------------------------------------------------------- \7\ Although Rule 4 is being amended to align with NSCC and FICC, where appropriate, a ``Defaulting Participant'' is not analogous to a ``Defaulting Member'' under the proposed NSCC and FICC rules. This is because the term ``Defaulting Participant'' already has a specific meaning pursuant to Rule 9(B) which is necessary and appropriate to that Rule. Instead, the proposed new term ``CTA Participant'' would be analogous to the NSCC and FICC proposed term ``Defaulting Member.'' --------------------------------------------------------------------------- (ii) Add the defined term ``CTA Participant,'' which would be defined as a Participant for which the Corporation has ceased to act pursuant to Rule 10 (Discretionary Termination), Rule 11 (Voluntary Termination) or Rule 12 (Insolvency). (iii) Clarify which Participants would be subject to loss allocation with respect to Default Loss Events (defined below) and Declared Non-Default Loss Events (defined below) occurring during an Event Period (defined below). Specifically, pursuant to the Amendment, proposed Section 5 of Rule 4 would provide that each Participant that is a Participant on the first day of an Event Period would be obligated to pay its pro rata share of losses and liabilities arising out of or relating to each Default Loss Event (other than a Default Loss Event with respect to which it is the CTA Participant) and each Declared Non- Default Loss Event occurring during the Event Period. In addition, proposed Section 5 of Rule 4 would make it clear that any CTA Participant for which DTC ceases to act on a non-Business Day, triggering an Event Period that commences on the next Business Day, would be deemed to be a Participant on the first day of that Event Period. (iv) Clarify the obligations and Loss Allocation Cap (defined below) of a Participant that terminates its business with DTC in respect of a loss allocation round. Specifically, pursuant to the Amendment, the Participant would nevertheless remain obligated for its pro rata share of losses and liabilities with respect to any Event Period for which it is otherwise obligated under Rule 4; however, its aggregate obligation would be limited to the amount of its Loss Allocation Cap, as fixed in the loss allocation round for which it withdrew. (v) Clarify that each CTA Participant would be obligated to DTC for the entire amount of any loss or liability incurred by DTC arising out of or relating to any Default Loss Event with respect to such CTA Participant. To the extent that such loss or liability is not satisfied pursuant to proposed Section 3 of Rule 4, DTC would apply a Corporate Contribution and charge the remaining amount of such loss or liability as provided in proposed Section 5 of Rule 4. (vi) Clarify that, although a CTA Participant would not be allocated a ratable share of losses and liabilities arising out of or relating to its own Default Loss Event, it would remain obligated to DTC for such losses and liabilities. More particularly, pursuant to the Amendment, the proposed rule change would provide that no loss allocation under proposed Rule 4 would constitute a waiver of any claim DTC may have against a Participant for any losses or liabilities to which the Participant is subject under DTC Rules and Procedures, including, without limitation, any loss or liability to which it may be subject under proposed Rule 4. (vii) For enhanced transparency and to align, where appropriate, with the rules of NSCC and FICC, clarify the process for the Voluntary Retirement (defined below) of a Participant. In addition, pursuant to the Amendment, DTC is making other clarifying and technical changes to the proposed rule change, as proposed herein. Nature of the Proposed Change The proposed rule change would revise Rule 4 (Participants Fund and Participants Investment) to (i) provide separate sections for (x) the use of the Participants Fund as a liquidity resource for settlement and (y) loss allocation among Participants of losses and liabilities arising out of Participant defaults or due to non-default events; and (ii) enhance the resiliency of DTC's loss allocation process so that DTC can take timely action to contain multiple loss events that occur in succession during a short period of time. In connection therewith, the proposed rule change would (i) align the loss allocation rules of the DTCC Clearing Agencies, so as to provide consistent treatment, to the extent practicable and appropriate, especially for firms that are participants of two or more DTCC Clearing Agencies,\8\ (ii) increase transparency and accessibility of the provisions relating to the use of the Participants Fund as a liquidity resource for settlement and the loss allocation provisions, by enhancing their readability and clarity, (iii) require a defined corporate contribution to losses and liabilities that are incurred by DTC prior to any allocation among Participants, whether such losses and liabilities arise out of Participant defaults or due to non-default events, (iv) reduce the time within which DTC is required to return a former Participant's Actual Participants Fund Deposit, and (v) make conforming and technical changes. In addition, the proposed rule change would amend Section 6 of Rule 4 to clarify the requirements for a Participant that wants to voluntarily terminate its business with DTC, and to align, where appropriate, with the proposed voluntary termination provisions of the NSCC and FICC rules. The proposed rule change would also amend Rule 1 (Definitions; Governing Law) to add cross-references to terms that would be defined in proposed Rule 4, and would amend Rule 2 (Participants and Pledgees), in relevant part, to align with proposed Section 6 of Rule 4, as discussed below. --------------------------------------------------------------------------- \8\ On December 18, 2017, NSCC and FICC submitted proposed rule changes and advance notices to enhance their rules regarding allocation of losses. Securities Exchange Act Release Nos. 82428 (January 2, 2018), 83 FR 897 (January 8, 2018) (SR-NSCC-2017-018), and 82584 (January 24, 2018), 83 FR 4377 (January 30, 2018) (SR- NSCC-2017-806); Securities Exchange Act Release Nos. 82427 (January 2, 2018), 83 FR 854 (January 8, 2018) (SR-FICC-2017-022) and 82583 (January 24, 2018), 83 FR 4358 (January 30, 2018) (SR-FICC-2017- 806). On June 28, 2018, NSCC and FICC filed proposed amendments to the proposed rule changes and advance notices with the Commission and the Board of Governors of the Federal Reserve System, respectively, available at http://www.dtcc.com/legal/sec-rule-filings.aspx. --------------------------------------------------------------------------- (i) Background Current Rule 4 provides a single set of tools and a common process for the use of the Participants Fund for both liquidity purposes to complete settlement among non-defaulting Participants, if one or more Participants [[Page 34248]] fails to settle,\9\ and for the satisfaction of losses and liabilities due to Participant defaults \10\ or certain other losses or liabilities incident to the business of DTC.\11\ The proposed rule change would amend and add provisions to separate use of the Participants Fund as a liquidity resource to complete settlement, reflected in proposed Section 4 of Rule 4, and for loss allocation, reflected in proposed Section 5 of Rule 4. There wouldn't be any substantive change to the rights and obligations of Participants under proposed Sections 4 and 5 of Rule 4.\12\ The proposed rule changes reinforce the distinction, conceptual and sequential, between the mechanisms to complete settlement on a Business Day and to mutualize losses that may result from a failure to settle, or other loss-generating events. The change is also proposed so that the loss allocation provisions of proposed Section 5 of Rule 4 more closely align to similar provisions of the NSCC and FICC rules, to the extent appropriate. --------------------------------------------------------------------------- \9\ DTC is a central securities depository providing key services that are structured to support daily settlement of book- entry transfers of securities, in accordance with its Rules and Procedures. In particular, Rule 9(A) (Transactions in Securities and Money Payments), Rule 9(B) (Transactions in Eligible Securities), Rule 9(C) (Transactions in MMI Securities), Rule 9(D) (Settling Banks), and Rule 9(E) (Clearing Agency Agreements) provide the mechanism to achieve a ``DVP Model 2 Deferred Net Settlement System'' (as defined in Annex D of the Principles for Financial Market Infrastructures issued by The Committee on Payments and Market Infrastructures and the Technical Committee of the International Organization of Securities Commissions (April 2012), available at https://www.bis.org/cpmi/publ/d101a.pdf. Briefly, in relevant part, Rule 9(B) provides that ``[e]ach Participant and the Corporation shall settle the balance of the Settlement Account of the Participant on a daily basis in accordance with these Rules and the Procedures. Except as provided in the Procedures, the Corporation shall not be obligated to make any settlement payments to any Participants until the Corporation has received all of the settlement payments that Settling Banks and Participants are required to make to the Corporation.'' Supra note 5. Pursuant to these provisions of Rule 9(B), securities will be delivered to Participants that satisfy their settlement obligations in the end- of-day net settlement process. \10\ The failure of a Participant to satisfy its settlement obligation constitutes a liability to DTC. Insofar as DTC undertakes to complete settlement among Participants other than the Participant that failed to settle, that liability may give rise to losses as well. DTC is designed to provide settlement finality at the end of the day and notwithstanding the failure to settle of a Participant or Affiliated Family of Participants with the largest net settlement obligation, a ``cover 1'' standard. There are no reversals of deliveries; a Participant that fails to settle will not receive securities that were intended to be delivered to it, because it has not paid for them. These securities, among others, serve as collateral for DTC to use to secure a borrowing of funds in order, in accordance with its Rules and Procedures, to settle with non- defaulting Participants (including those delivering Participants that delivered to the non-settling Participant). To this end, delivery versus payment transactions (``DVP'') will not be processed intraday to a receiving Participant that will incur a related payment obligation unless that Participant satisfies risk management controls. The two risk management controls are the Collateral Monitor and Net Debit Cap. Net Debit Caps limit the potential settlement obligation of any Participant to an amount for which DTC has sufficient liquidity resources to cover this risk. The Collateral Monitor tests whether a Participant has sufficient collateral for DTC to pledge or liquidate if that Participant were to fail to meet its settlement obligation. To process a DVP, the value of the delivery that is debited to the receiving Participant cannot cause the net debit balance of the Participant to exceed its Net Debit Cap, and the amount of the net debit balance after giving effect to the debit must be fully collateralized. Accordingly, DTC may incur a liability or loss whenever it completes settlement despite the failure to settle of a Participant, or Affiliated Family of Participants, because it is either using the Participants Fund deposits of other Participants in the manner specified in existing and proposed Rule 4 and/or borrowing the necessary funds. DTC obligations under the line of credit include the obligation to pay interest on loans outstanding and to repay the loan; the Participants Fund is designed as not only a direct liquidity resource but as a back-up liquidity resource to satisfy these liabilities. As to the Participants Fund itself, DTC undertakes in Section 9 of existing and proposed Rule 4, to restore funds to Participants whose deposits may have been charged if there is ultimately any excess recovery. It should be noted that the Defaulting Participant remains principally obligated for all losses, costs and expenses associated with its Participant Default and, so, a recovery out of the estate of a Defaulting Participant is at least a hypothetical possibility. \11\ Section 1(f) of Rule 4 defines the term ``business'' with respect to DTC as ``the doing of all things in connection with or relating to the Corporation's performance of the services specified in the first and second paragraphs of Rule 6 or the cessation of such services.'' Supra note 5. \12\ It may be noted that absent extreme circumstances, DTC believes that it is unlikely that DTC would need to act under proposed Sections 4 or 5 of Rule 4. --------------------------------------------------------------------------- The proposed rule change would retain the core principles of current Rule 4 for both application of the Participants Fund as a liquidity resource to complete settlement and for loss allocation, while clarifying or refining certain provisions and introducing certain new concepts relating to loss allocation. In connection with the use of the Participants Fund as a liquidity resource to complete settlement when a Participant fails to settle, the proposed rule would introduce the term ``pro rata settlement charge,'' for the use of the Participants Fund to complete settlement as apportioned among non- defaulting Participants. The existing term generically applied to such a use or to a loss allocation is simply a ``pro rata charge''.\13\ --------------------------------------------------------------------------- \13\ See Rule 4, Section 5, supra note 5. --------------------------------------------------------------------------- For loss allocation, the proposed rule change, like current Rule 4, would continue to apply to both default and non-default losses and liabilities, and, to the extent allocated among Participants, would be charged ratably in accordance with their Required Participants Fund Deposits.\14\ A new provision would require DTC to contribute to a loss or liability, either arising from a Participant default or non-default event, prior to any allocation among Participants. The proposed rule change would also introduce the new concepts of an ``Event Period'' and a ``round'' to address the allocation of losses arising from multiple events that occur in succession during a short period of time. These proposed rule changes would be substantially similar in these respects to analogous proposed rule changes for NSCC and FICC. --------------------------------------------------------------------------- \14\ It may be noted that for NSCC and FICC, the proposed rule changes for loss allocation include a ``look-back'' period to calculate a member's pro rata share and cap. The concept of a look- back or average is already built into DTC's calculation of Participants Fund requirements, which are based on a rolling sixty (60) day average of a Participant's six highest intraday net debit peaks. --------------------------------------------------------------------------- Current Rule 4 Provides for Application of the Participants Fund Through Pro Rata Charges Current Rule 4 addresses the Participants Fund and Participants Investment requirements and, among other things, the permitted uses of the Participants Fund and Participants Investment.\15\ Pursuant to current Rule 4, DTC maintains a cash Participants Fund. The Required Participants Fund Deposit for any Participant is based on the liquidity risk it poses to DTC relative to other Participants. --------------------------------------------------------------------------- \15\ Each Participant is required to invest in DTC Series A Preferred Stock, ratably on a basis calculated in substantially the same manner as the Required Participants Fund Deposit. The Preferred Stock constitutes capital of DTC and is also available for use as provided in current and proposed Section 3 of Rule 4. This proposed rule change does not alter the Required Preferred Stock Investment. --------------------------------------------------------------------------- Default of a Participant. Under current Section 3 of Rule 4, if a Participant is obligated to DTC and fails to satisfy any obligation, DTC may, in such order and in such amounts as DTC shall determine in its sole discretion: (a) Apply some or all of the Actual Participants Fund Deposit of such Participant to such obligation; (b) Pledge some or all of the shares of Preferred Stock of such Participant to its lenders as collateral security for a loan under the End-of-Day Credit Facility; \16\ and/or (c) sell some or all of the shares of Preferred Stock of such Participant to other Participants (who shall be [[Page 34249]] required to purchase such shares pro rata their Required Preferred Stock Investments at the time of such purchase), and apply the proceeds of such sale to satisfy such obligation. --------------------------------------------------------------------------- \16\ As part of its liquidity risk management regime, DTC maintains a 364-day committed revolving line of credit with a syndicate of commercial lenders, renewed every year. The committed aggregate amount of the End-of-Day Credit Facility (currently $1.9 billion) together with the Participants Fund constitute DTC's liquidity resources for settlement. Based on these amounts, DTC sets Net Debit Caps that limit settlement obligations. --------------------------------------------------------------------------- Application of the Participants Fund. Current Section 4 of Rule 4 addresses the application of the Participants Fund if DTC incurs a loss or liability, which would include application of the Participants Fund to complete settlement \17\ or the allocation of losses once determined, including non-default losses. For both liquidity and loss scenarios, current Section 4 of Rule 4 provides that an application of the Participants Fund would be apportioned among Participants ratably in accordance with their Required Participants Fund Deposits, less any additional amount that a Participant was required to Deposit to the Participants Fund pursuant to Section 2 of Rule 9(A).\18\ It also provides for the optional use of an amount of DTC's retained earnings and undivided profits. --------------------------------------------------------------------------- \17\ In contrast to NSCC and FICC, DTC is not a central counterparty and does not guarantee obligations of its membership. The Participants Fund is a mutualized pre-funded liquidity and loss resource. As such, in contrast to NSCC and FICC, DTC does not have an obligation to ``repay'' the Participants Fund, and the application of the Participants Fund does not convert to a loss. See supra note 10. \18\ Section 2 of Rule 9(A) provides, in part, ``At the request of the Corporation, a Participant or Pledgee shall immediately furnish the Corporation with such assurances as the Corporation shall require of the financial ability of the Participant or Pledgee to fulfill its commitments and shall conform to any conditions which the Corporation deems necessary for the protection of the Corporation, other Participants or Pledgees, including deposits to the Participants Fund . . .'' Supra note 5. Pursuant to the proposed rule change, the additional amount that a Participant is required to Deposit to the Participants Fund pursuant to Section 2 of Rule 9(A) would be defined as an ``Additional Participants Fund Deposit.'' This is not a new concept, only the addition of a defined term for greater clarity. --------------------------------------------------------------------------- After the Participants Fund is applied pursuant to current Section 4, DTC must promptly notify each Participant and the Commission of the amount applied and the reasons therefor. Current Rule 4 further requires Participants whose Actual Participants Fund Deposits have been ratably charged to restore their Required Participants Fund Deposits, if such charges create a deficiency. Such payments are due upon demand. Iterative pro rata charges relating to the same loss or liability are permitted in order to satisfy the loss or liability. Rule 4 currently provides that a Participant may, within ten (10) Business Days after receipt of notice of any pro rata charge, notify DTC of its election to terminate its business with DTC, and the exposure of the terminating Participant for pro rata charges would be capped at the greater of (a) the amount of its Aggregate Required Deposit and Investment, as fixed immediately prior to the time of the first pro rata charge, plus 100% of the amount thereof, or (b) the amount of all prior pro rata charges attributable to the same loss or liability with respect to which the Participant has not timely exercised its right to terminate. Overview of the Proposed Rule Changes A. Application of Participants Fund to Participant Default and for Settlement Proposed Section 3 of Rule 4 would retain the concept that when a Participant is obligated to DTC and fails to satisfy such obligation, which would be defined as a ``Participant Default,'' DTC may apply the Actual Participants Fund Deposit of the Participant to such obligation to satisfy the Participant Default. The proposed rule change would reflect that the defined term ``Participant Default,'' referring to the failure of a Participant to satisfy any obligation to DTC, includes the failure of a Defaulting Participant to satisfy its obligations as provided in Rule 9(B) (where ``Defaulting Participant'' is defined). The proposed definition of ``Participant Default'' is for drafting clarity and use in related provisions of proposed Rule 4. Proposed Section 4 would address the situation of a Defaulting Participant failure to settle (which is one type of Participant Default) if the application of the Actual Participants Fund Deposit of that Defaulting Participant, pursuant to proposed Section 3, is not sufficient to complete settlement among Participants other than the Defaulting Participant (each, a ``non-defaulting Participant'').\19\ --------------------------------------------------------------------------- \19\ As described above, proposed Rule 4 splits the liquidity and loss provisions to more closely align to similar loss allocation provisions in NSCC and FICC rules. Pursuant to the proposed rule change, DTC would also align, where appropriate, the liquidity and loss provisions within proposed Rule 4. DTC would retain the existing Rule 4 concepts of calculating the ratable share of a Participant, charging each non-defaulting Participant a pro rata share of an application of the Participants Fund to complete settlement, providing notice to Participants of such charge, and providing each Participant the option to cap its liability for such charges by electing to terminate its business with DTC. However, pursuant to the proposed rule change, DTC would modify these concepts and certain associated processes to more closely align with the analogous proposed loss allocation provisions in proposed Rule 4 (e.g., Loss Allocation Notice, Loss Allocation Termination Notification Period, and Loss Allocation Cap). --------------------------------------------------------------------------- Proposed Section 4 would expressly state that the Participants Fund shall constitute a liquidity resource which may be applied by DTC, in such amounts as it may determine, in its sole discretion, to fund settlement among non-defaulting Participants in the event of the failure of a Defaulting Participant to satisfy its settlement obligation on any Business Day. Such an application of the Participants Fund would be charged ratably to the Actual Participants Fund Deposits of the non-defaulting Participants on that Business Day. The pro rata charge per non-defaulting Participant would be based on the ratio of its Required Participants Fund Deposit to the sum of the Required Participants Fund Deposits of all such Participants on that Business Day (excluding any Additional Participants Fund Deposits in both the numerator and denominator of such ratio). The proposed rule change would identify this as a ``pro rata settlement charge,'' in order to distinguish application of the Participants Fund to fund settlement from pro rata loss allocation charges that would be established in proposed Section 5 of Rule 4. The calculation of each non-defaulting Participant's pro rata settlement charge would be similar to the current Section 4 calculation of a pro rata charge except that, for greater simplicity, it would not include the current distinction for common members of another clearing agency pursuant to a Clearing Agency Agreement.\20\ For enhanced clarity as to the date of determination of the ratio, it would be based on the Required Participants Fund Deposits as fixed on the Business Day of the application of the Participants Fund, as opposed to the current language ``at the time the loss or liability was discovered.'' \21\ --------------------------------------------------------------------------- \20\ Rule 4, Section 4(a)(1), supra note 5. DTC has determined that this option is unnecessary because, in practice, DTC would never have liability under a Clearing Agency Agreement that exceeds the excess assets of the Participant that defaulted. \21\ DTC believes that this change would provide an objective date that is more appropriate for the application of the Participants Fund to complete settlement, because the ``time the loss or liability was discovered'' would necessarily have to be the day the Participants Fund was applied to complete settlement. --------------------------------------------------------------------------- The proposed rule change would retain the concept that requires DTC, following the application of the Participants Fund to complete settlement, to notify each Participant and the Commission of the charge and the reasons therefor (``Settlement Charge Notice''). The proposed rule change also would retain the concept of providing each non-defaulting Participant an opportunity to elect to terminate its business with DTC and thereby cap its exposure to further pro rata settlement charges. The proposed rule change would shorten the notification period [[Page 34250]] for the election to terminate from ten (10) Business Days to five (5) Business Days,\22\ and would also change the beginning date of such notification period from the receipt of the notice to the date of the issuance of the Settlement Charge Notice.\23\ A Participant that elects to terminate its business with DTC would, subject to its cap, remain responsible for (i) its pro rata settlement charge that was the subject of the Settlement Charge Notice and (ii) all other pro rata settlement charges until the Participant Termination Date (as defined below and in the proposed rule change). The proposed cap on pro rata settlement charges of a Participant that has timely notified DTC of its election to terminate its business with DTC would be the amount of its Aggregate Required Deposit and Investment, as fixed on the day of the pro rata settlement charge that was the subject of the Settlement Charge Notice, plus 100% of the amount thereof (``Settlement Charge Cap''). The proposed Settlement Charge Cap would be no greater than the current cap.\24\ --------------------------------------------------------------------------- \22\ DTC believes this shorter period would be sufficient for a Participant to decide whether to give notice to terminate its business with DTC in response to a settlement charge. In addition, a five (5) Business Day pro rata settlement charge notification period would conform to the proposed loss allocation notification period in this proposed rule change and in the proposed rule changes for NSCC and FICC. See infra note 37. \23\ DTC believes that setting the start date of the notification period to an objective date would enhance transparency and provide a common timeframe to all affected Participants. \24\ Current Section 8 of Rule 4 provides for a cap that is equal to the greater of (a) the amount of its Aggregate Required Deposit and Investment, as fixed immediately prior to the time of the first pro rata charge, plus 100% of the amount thereof, or (b) the amount of all prior pro rata charges attributable to the same loss or liability with respect to which the Participant has not timely exercised its right to limit its obligation as provided above. Supra note 5. The alternative limit in clause (b) would be eliminated in proposed Section 8(a) in favor of a single defined standard. --------------------------------------------------------------------------- The pro rata application of the Actual Participants Fund Deposits of non-defaulting Participants to complete settlement when there is a Participant Default is not the allocation of a loss. A pro rata settlement charge would relate solely to the completion of settlement. New proposed loss allocation concepts described below, including, but not limited to, a ``round,'' ``Event Period,'' and ``Corporate Contribution,'' would not apply to pro rata settlement charges.\25\ --------------------------------------------------------------------------- \25\ Proposed Sections 3, 4 and 5 of Rule 4 together relate, in whole or in part, to what may happen when there is a Participant Default. Proposed Section 3 is the basic provision of remedies if a Participant fails to satisfy an obligation to DTC. Proposed Section 4 is a specific remedy for a failure to settle by a Defaulting Participant, i.e., a specific type of Participant Default. Proposed Section 5 is also a remedial provision for a Participant Default when, additionally, DTC ceases to act for the Participant and there are remaining losses or liabilities. If a Participant Default occurs, the application of proposed Section 3 would be required, the application of proposed Section 4 would be at the discretion of DTC. Whether or not proposed Section 4 has been applied, once there is a loss due to a Participant Default and DTC ceases to act for the Participant, proposed Section 5 would apply. See supra note 10. A principal type of Participant Default is a failure to settle. A Participant's obligation to pay any amount due in settlement is secured by Collateral of the Participant. When the Defaulting Participant fails to pay its settlement obligation, under Rule 9(B), Section 2, DTC has the right to Pledge or sell such Collateral to satisfy the obligation. Supra note 5. (It is more likely that DTC would borrow against the Collateral to complete settlement on the Business Day, because it is unlikely to be able to liquidate Collateral for same day funds in time to settle on that Business Day.) If DTC Pledges the Collateral to secure a loan to fund settlement (e.g., under the End-of-Day Credit Facility), the Collateral would have to be sold to obtain funds to repay the loan. In any such sale of the Collateral, there is a risk, heightened in times of market stress, that the proceeds of the sale would be insufficient to repay the loan. That deficiency would be a liability or loss to which proposed Section 5 of Rule 4 would apply, i.e., a Default Loss Event. --------------------------------------------------------------------------- B. Changes To Enhance Resiliency of DTC's Loss Allocation Process In order to enhance the resiliency of DTC's loss allocation process and to align, to the extent practicable and appropriate, its loss allocation approach to that of the other DTCC Clearing Agencies, DTC proposes to introduce certain new concepts and to modify other aspects of its loss allocation waterfall. The proposed rule change would adopt an enhanced allocation approach for losses, whether arising from Default Loss Events or Declared Non-Default Loss Events (as defined below and in the proposed rule change). In addition, the proposed rule change would clarify the loss allocation process as it relates to losses arising from or relating to multiple default or non-default events in a short period of time. Accordingly, DTC is proposing four (4) key changes to enhance DTC's loss allocation process: (1) Mandatory Corporate Contribution Current Section 4 of Rule 4 provides that if there is an unsatisfied loss or liability, DTC may, in its sole discretion and in such amount as DTC would determine, ``charge the existing retained earnings and undivided profits'' of DTC. Under the proposed rule change, DTC would replace the discretionary application of an unspecified amount of retained earnings and undivided profits with a mandatory, defined Corporate Contribution (as defined below and in the proposed rule change). The Corporate Contribution would be used for losses and liabilities that are incurred by DTC with respect to an Event Period (as defined below and in the proposed rule change), whether arising from a Default Loss Event or Declared Non- Default Loss Event, before the allocation of losses to Participants. The proposed ``Corporate Contribution'' would be defined to be an amount equal to fifty percent (50%) of DTC's General Business Risk Capital Requirement.\26\ DTC's General Business Risk Capital Requirement, as defined in DTC's Clearing Agency Policy on Capital Requirements,\27\ is, at a minimum, equal to the regulatory capital that DTC is required to maintain in compliance with Rule 17Ad-22(e)(15) under the Securities Exchange Act of 1934, as amended (the ``Act'').\28\ The proposed Corporate Contribution would be held in addition to DTC's General Business Risk Capital Requirement. --------------------------------------------------------------------------- \26\ DTC calculates its General Business Risk Capital Requirement as the amount equal to the greatest of (i) an amount determined based on its general business profile, (ii) an amount determined based on the time estimated to execute a recovery or orderly wind-down of DTC's critical operations, and (iii) an amount determined based on an analysis of DTC's estimated operating expenses for a six (6) month period. \27\ See Securities Exchange Act Release No. 81105 (July 7, 2017), 82 FR 32399 (July 13, 2017) (SR-DTC-2017-003). \28\ 17 CFR 240.17Ad-22(e)(15). --------------------------------------------------------------------------- The proposed Corporate Contribution would apply to losses arising from Default Loss Events and Declared Non-Default Loss Events, and would be a mandatory contribution of DTC prior to any allocation among Participants.\29\ As proposed, if the proposed Corporate Contribution is fully or partially used against a loss or liability relating to an Event Period, the Corporate Contribution would be reduced to the remaining unused amount, if any, during the following two hundred fifty (250) Business Days in order to permit DTC to replenish the Corporate Contribution.\30\ To ensure transparency, Participants would receive notice of any such reduction to the Corporate Contribution. --------------------------------------------------------------------------- \29\ The proposed rule change would not require a Corporate Contribution with respect to a pro rata settlement charge. However, as discussed above, if, after a Participant Default, the proceeds of the sale of the Collateral of the Participant are insufficient to repay the lenders under the End-of-Day Credit Facility, and DTC has ceased to act for the Participant, the shortfall would be a loss arising from a Default Loss Event, subject to the Corporate Contribution. \30\ DTC believes that two hundred fifty (250) Business Days would be a reasonable estimate of the time frame that DTC would require to replenish the Corporate Contribution by equity in accordance with DTC's Clearing Agency Policy on Capital Requirements, including a conservative additional period to account for any potential delays and/or unknown exigencies in times of distress. --------------------------------------------------------------------------- By requiring a defined contribution of DTC corporate funds towards losses and [[Page 34251]] liabilities arising from Default Loss Events and Declared Non-Default Loss Events, the proposed rule change would limit Participant obligations to the extent of such Corporate Contribution and thereby provide greater clarity and transparency to Participants as to the calculation of their exposure to losses and liabilities. Proposed Rule 4 would also further clarify that DTC can voluntarily apply amounts greater than the Corporate Contribution against any loss or liability (including non-default losses) of DTC, if the Board of Directors, in its sole discretion, believes such to be appropriate under the factual situation existing at the time. The proposed rule changes relating to the calculation and mandatory application of the Corporate Contribution are set forth in proposed Section 5 of Rule 4. (2) Introducing an Event Period The proposed rule change would clearly define the obligations of DTC and its Participants regarding the allocation of losses or liabilities relating to or arising out of a Default Loss Event or a Declared Non-Default Loss Event. The proposed rule change would define ``Default Loss Event'' as the determination by DTC to cease to act for a Participant pursuant to Rule 10, Rule 11, or Rule 12 (such Participant, a ``CTA Participant''). ``Declared Non-Default Loss Event'' would be defined as the determination by the Board of Directors that a loss or liability incident to the clearance and settlement business of DTC may be a significant and substantial loss or liability that may materially impair the ability of DTC to provide clearance and settlement services in an orderly manner and will potentially generate losses to be mutualized among Participants in order to ensure that DTC may continue to offer clearance and settlement services in an orderly manner. In order to balance the need to manage the risk of sequential loss events against Participants' need for certainty concerning maximum loss allocation exposures, DTC is proposing to introduce the concept of an ``Event Period'' to address the losses and liabilities that may arise from or relate to multiple Default Loss Events and/or Declared Non-Default Loss Events that arise in quick succession. Specifically, the proposal would group Default Loss Events and Declared Non-Default Loss Events occurring in a period of ten (10) Business Days (``Event Period'') for purposes of allocating losses to Participants in one or more rounds, subject to the limits of loss allocation set forth in the proposed rule change and as explained below.\31\ In the case of a loss or liability arising from or relating to a Default Loss Event, an Event Period would begin on the day on which DTC notifies Participants that it has ceased to act for a Participant (or the next Business Day, if such day is not a Business Day). In the case of a Declared Non-Default Loss Event, the Event Period would begin on the day that DTC notifies Participants of the Declared Non-Default Loss Event (or the next Business Day, if such day is not a Business Day). If a subsequent Default Loss Event or Declared Non-Default Loss Event occurs within the Event Period, any losses or liabilities arising out of or relating to any such subsequent event would be resolved as losses or liabilities that are part of the same Event Period, without extending the duration of such Event Period. An Event Period may include both Default Loss Events and Declared Non-Default Loss Events, and there would not be separate Event Periods for Default Loss Events or Declared Non-Default Loss Events occurring within overlapping ten (10) Business Day periods. --------------------------------------------------------------------------- \31\ DTC believes that having a ten (10) Business Day Event Period would provide a reasonable period of time to encompass potential sequential Default Loss Events and/or Declared Non-Default Loss Events that are likely to be closely linked to an initial event and/or a severe market dislocation episode, while still providing appropriate certainty for Participants concerning their maximum exposure to allocated losses with respect to such events. --------------------------------------------------------------------------- The amount of losses that may be allocated by DTC, subject to the required Corporate Contribution, and to which a Loss Allocation Cap would apply for any Participant that elects to terminate its business with DTC in respect of a loss allocation round, would include any and all losses from any Default Loss Events and any Declared Non-Default Loss Events during the Event Period, regardless of the amount of time, during or after the Event Period, required for such losses to be crystallized and allocated.\32\ --------------------------------------------------------------------------- \32\ As discussed below, each Participant that is a Participant on the first day of an Event Period would be obligated to pay its pro rata share of losses and liabilities arising out of or relating to each Default Loss Event (other than a Default Loss Event with respect to which it is the CTA Participant) and each Declared Non- Default Loss Event occurring during the Event Period. --------------------------------------------------------------------------- The proposed rule changes relating to the implementation of an Event Period are set forth in proposed Section 5 of Rule 4. (3) Introducing the Concept of ``Rounds'' and Loss Allocation Notice Pursuant to the proposed rule change, a loss allocation ``round'' would mean a series of loss allocations relating to an Event Period, the aggregate amount of which is limited by the sum of the Loss Allocation Caps of affected Participants (a ``round cap''). When the aggregate amount of losses allocated in a round equals the round cap, any additional losses relating to the applicable Event Period would be allocated in one or more subsequent rounds, in each case subject to a round cap for that round. DTC would continue the loss allocation process in successive rounds until all losses from the Event Period are allocated among Participants that have not submitted a Termination Notice (as defined below and in the proposed rule change) in accordance with proposed Section 6(b) of Rule 4. Each loss allocation would be communicated to Participants by the issuance of a notice that advises each Participant of the amount being allocated to it (each, a ``Loss Allocation Notice''). The calculation of each Participant's pro rata allocation charge would be similar to the current Section 4 calculation of a pro rata charge except that, for greater simplicity, it would not include the current distinction for common members of another clearing agency pursuant to a Clearing Agency Agreement.\33\ In addition, for enhanced clarity as to the date of determination of the ratio, it would be based on the Required Participants Fund Deposits as fixed on the first day of the Event Period, as opposed to the current language ``at the time the loss or liability was discovered.'' \34\ --------------------------------------------------------------------------- \33\ See supra note 20. \34\ DTC believes that this change would provide an objective date that is appropriate for the new proposed loss allocation process, which would be designed to allocate aggregate losses relating to an Event Period, rather than one loss at a time. --------------------------------------------------------------------------- Each Loss Allocation Notice would specify the relevant Event Period and the round to which it relates. Participants would receive two (2) Business Days' notice of a loss allocation,\35\ and Participants would be required to pay the requisite amount no later than the second Business Day following the issuance of such notice.\36\ [[Page 34252]] Multiple Loss Allocation Notices may be issued with respect to each round, up to the round cap. --------------------------------------------------------------------------- \35\ DTC believes allowing Participants two (2) Business Days to satisfy their loss allocation obligations would provide Participants sufficient notice to arrange funding, if necessary, while allowing DTC to address losses in a timely manner. \36\ Current Section 4 of Rule 4 provides that if the Participants Fund is applied to a loss or liability, DTC must notify each Participant of the charge and the reasons therefor. Proposed Section 5 would modify this process to (i) require DTC to give prior notice; and (ii) require Participants to pay loss allocation charges, rather than directly charging their Required Participants Fund Deposits. DTC believes that shifting from the two-step methodology of applying the Participants Fund and then requiring Participants to immediately replenish it to requiring direct payment would increase efficiency, while preserving the right to charge the Settlement Account of the Participant in the event the Participant doesn't timely pay. Such a failure to pay would be, self-evidently, a Participant Default, triggering recourse to the Actual Participants Fund Deposit of the Participant under proposed Section 3 of Rule 4. In addition, this change would provide greater stability for DTC in times of stress by allowing DTC to retain the Participants Fund, its critical pre-funded resource, while charging loss allocations. DTC believes doing so would allow DTC to retain the Participants Fund as a liquidity resource which may be applied to fund settlement among non-defaulting Participants, if a Defaulting Participant fails to settle. By being able to manage its liquidity resources throughout the loss allocation process, DTC would be able to continue to provide its critical operations and services during what would be expected to be a stressful period. --------------------------------------------------------------------------- The first Loss Allocation Notice in any first, second, or subsequent round would expressly state that such Loss Allocation Notice reflects the beginning of the first, second, or subsequent round, as the case may be, and that each Participant in that round has five (5) Business Days \37\ from the issuance \38\ of such first Loss Allocation Notice for the round (such period, a ``Loss Allocation Termination Notification Period'') to notify DTC of its election to terminate its business with DTC (such notification, whether with respect to a Settlement Charge Notice or Loss Allocation Notice, a ``Termination Notice'') pursuant to proposed Section 8(b) of Rule 4 and thereby benefit from its Loss Allocation Cap. --------------------------------------------------------------------------- \37\ Current Section 8 of Rule 4 provides that the time period for a Participant to give notice of its election to terminate its business with DTC in respect of a pro rata charge is ten (10) Business Days after receiving notice of a pro rata charge. DTC believes that it is appropriate to shorten such time period from ten (10) Business Days to five (5) Business Days because DTC needs timely notice of which Participants would not be terminating their business with DTC for the purpose of calculating the loss allocation for any subsequent round. DTC believes that five (5) Business Days would provide Participants with sufficient time to decide whether to cap their loss allocation obligations by terminating their business with DTC. \38\ See supra note 23. --------------------------------------------------------------------------- The round cap of any second or subsequent round may differ from the first or preceding round cap because there may be fewer Participants in a second or subsequent round if Participants elect to terminate their business with DTC as provided in proposed Section 8(b) of Rule 4 following the first Loss Allocation Notice in any round. For example, for illustrative purposes only, after the required Corporate Contribution, if DTC has a $4 billion loss determined with respect to an Event Period and the sum of Loss Allocation Caps for all Participants subject to the loss allocation is $3 billion, the first round would begin when DTC issues the first Loss Allocation Notice for that Event Period. DTC could issue one or more Loss Allocation Notices for the first round until the sum of losses allocated equals $3 billion. Once the $3 billion is allocated, the first round would end and DTC would need a second round in order to allocate the remaining $1 billion of loss. DTC would then issue a Loss Allocation Notice for the $1 billion and this notice would be the first Loss Allocation Notice for the second round. The issuance of the Loss Allocation Notice for the $1 billion would begin the second round. The proposed rule change would link the Loss Allocation Cap to a round in order to provide Participants the option to limit their loss allocation exposure at the beginning of each round. As proposed, a Participant could limit its loss allocation exposure to its Loss Allocation Cap by providing notice of its election to terminate its business with DTC within five (5) Business Days after the issuance of the first Loss Allocation Notice in any round. The proposed rule changes relating to the implementation of ``rounds'' and Loss Allocation Notices are set forth in proposed Section 5 of Rule 4. (4) Capping Terminating Participants' Loss Allocation Exposure and Related Changes As discussed above, the proposed rule change would continue to provide Participants the opportunity to limit their loss allocation exposure by offering a termination option; however, the associated termination process would be modified. As proposed, if a Participant timely provides notice of its election to terminate its business with DTC as provided in proposed Section 8(b) of Rule 4, its maximum payment obligation with respect to any loss allocation round would be the amount of its Aggregate Required Deposit and Investment, as fixed on the first day of the Event Period, plus 100% of the amount thereof (``Loss Allocation Cap''),\39\ provided that the Participant complies with the requirements of the termination process in proposed Section 6(b) of Rule 4. DTC may retain the entire Actual Participants Fund Deposit of a Participant subject to loss allocation, up to the Participant's Loss Allocation Cap. If a Participant's Loss Allocation Cap exceeds the Participant's then- current Required Participants Fund Deposit, it must still pay the excess amount. --------------------------------------------------------------------------- \39\ The alternative limit in clause (b) would be eliminated in proposed Section 8(b) in favor of a single defined standard. See supra note 24. --------------------------------------------------------------------------- As proposed, Participants would have five (5) Business Days from the issuance of the first Loss Allocation Notice in any round to decide whether to terminate its business with DTC, and thereby benefit from its Loss Allocation Cap. The start of each round \40\ would allow a Participant the opportunity to notify DTC of its election to terminate its business with DTC after satisfaction of the losses allocated in such round. --------------------------------------------------------------------------- \40\ i.e., a Participant will only have the opportunity to terminate after the first Loss Allocation Notice in any round, and not after each Loss Allocation Notice in any round. --------------------------------------------------------------------------- Specifically, the first round and each subsequent round of loss allocation would allocate losses up to a round cap of the aggregate of all Loss Allocation Caps of those Participants included in the round. If a Participant provides notice of its election to terminate its business with DTC, it would be subject to loss allocation in that round, up to its Loss Allocation Cap. If the first round of loss allocation does not fully cover DTC's losses, a second round will be noticed to those Participants that did not elect to terminate in the previous round. As noted above, the amount of any second or subsequent round cap may differ from the first or preceding round cap because there may be fewer Participants in a second or subsequent round if Participants elect to terminate their business with DTC as provided in proposed Section 8(b) of Rule 4 following the first Loss Allocation Notice in any round. Pursuant to the proposed rule change, in order to avail itself of its Loss Allocation Cap, the Participant would need to follow the requirements in proposed Section 6(b) of Rule 4. In addition to retaining the substance of the existing requirements for any termination that are set forth in current Section 6 of Rule 4, proposed Section 6 also would provide that a Participant that provides a Termination Notice in connection with a loss allocation must: (1) Specify in the Termination Notice an effective date of termination (``Participant Termination Date''), which date shall be no later than ten (10) Business Days following the last day of the applicable Loss Allocation Termination Notification Period; (2) cease all activities and use of the Corporation's services other than activities and services necessary to terminate the business of the Participant with DTC; and (3) ensure that all activities and use of DTC services by such Participant cease on or prior to the Participant Termination Date. [[Page 34253]] The proposed rule changes are designed to enable DTC to continue the loss allocation process in successive rounds until all of DTC's losses are allocated. Until all losses related to an Event Period are allocated and paid, DTC may retain the entire Actual Participants Fund Deposit of a Participant subject to loss allocation, up to the Participant's Loss Allocation Cap. The proposed rule changes relating to capping terminating Participants' loss allocation exposure and related changes to the termination process are set forth in proposed Sections 5, 6, and 8 of Rule 4. C. Clarifying Changes Relating to Loss Allocation for Non-Default Events The proposed rule changes are intended to make the provisions in the Rules governing loss allocation more transparent and accessible to Participants. In particular, DTC is proposing the following change relating to loss allocation to provide clarity around the governance for the allocation of losses arising from a non-default event.\41\ --------------------------------------------------------------------------- \41\ Non-default losses may arise from events such as damage to physical assets, a cyber-attack, or custody and investment losses. --------------------------------------------------------------------------- Currently, DTC can use the Participants Fund to satisfy losses and liabilities arising from a Participant Default or arising from an event that is not due to a Participant Default (i.e., a non-default loss), provided that such loss or liability is incident to the business of DTC.\42\ --------------------------------------------------------------------------- \42\ See supra note 11. --------------------------------------------------------------------------- DTC is proposing to clarify the governance around non-default losses that would trigger loss allocation to Participants by specifying that the Board of Directors would have to determine that there is a non-default loss that may be a significant and substantial loss or liability that may materially impair the ability of DTC to provide clearance and settlement services in an orderly manner and will potentially generate losses to be mutualized among the Participants in order to ensure that DTC may continue to offer clearance and settlement services in an orderly manner. The proposed rule change would provide that DTC would then be required to promptly notify Participants of this determination, which is referred to in the proposed rule as a Declared Non-Default Loss Event, as discussed above. Finally, as previously discussed, pursuant to the proposed rule change, proposed Rule 4 would include language to clarify that (i) the Corporate Contribution would apply to losses or liabilities arising from a Default Loss Event or a Declared Non-Default Loss Event, and (ii) the loss allocation waterfall would be applied in the same manner regardless of whether a loss arises from a Default Loss Event or a Declared Non-Default Loss Event. The proposed rule changes relating to Declared Non-Default Loss Events and Participants' obligations for such events are set forth in proposed Section 5 of Rule 4. D. Loss Allocation Waterfall Comparison The following example illustrates the differences between the current and proposed loss allocation provisions: Assumptions: (i) Participant A defaults on a Business Day (Day 1). On the same day, DTC ceases to act for Participant A, and notifies Participants of the cease to act. After applying Participant A's Participants Fund and liquidating Participant A's Collateral, DTC has a loss of $350 million. (ii) Participant X voluntarily retires from membership five Business Days after DTC ceases to act for Participant A (Day 6). (iii) Participant B defaults seven Business Days after DTC ceases to act for Participant A (Day 8). On the same day, DTC ceases to act for Participant B, and notifies Participants of the cease to act. After applying Participant B's Participants Fund and liquidating Participant B's Collateral, DTC has a loss of $350 million. (iv) The current DTC loss allocation provisions do not require a corporate contribution. DTC may, in its sole discretion and in such amounts as DTC may determine, charge the existing retained earnings and undivided profits of DTC. For the purposes of this example, it is assumed that DTC has determined, in its discretion, that DTC will contribute 25% of its retained earnings and undivided profits. The amount of DTC's retained earnings and undivided profits is $364 million. (v) DTC's General Business Risk Capital Requirement is $158 million. Current Loss Allocation: Under the current loss allocation provisions, with respect to the losses arising out of Participant A's default, DTC will contribute $91 million ($364 million * 25%) from retained earnings and undivided profits, and then allocate the remaining loss of $259 million ($350 million - $91 million) to Participants. With respect to the losses arising out of Participant B's default, DTC will contribute $68 million (($364 million - $91 million) * 25%) from the balance of its retained earnings and undivided profits, and then allocate the remaining loss of $282 million ($350 million - $68 million) to Participants. Because Participant X voluntarily retired before DTC ceased to act for Participant B, Participant X is not subject to loss allocation with respect to losses arising out of Participant B's default. Altogether, with respect to the losses arising out of defaults of Participant A and Participant B, DTC will contribute $159 million of retained earnings and undivided profits, and will allocate losses of $541 million to Participants. Proposed Loss Allocation: Under the proposed loss allocation provisions, a Default Loss Event with respect to Participant A's default would have occurred on Day 1, and a Default Loss Event with respect to Participant B's default would have occurred on Day 8. Because the Default Loss Events occurred during a 10-Business Day period they would be grouped together into an Event Period for purposes of allocating losses to Participants. The Event Period would begin on the 1st Business Day and end on the 10th Business Day. With respect to losses arising out of Participant A's default, DTC would apply a Corporate Contribution of $79 million ($158 million * 50%) and then allocate the remaining loss of $271 million ($350 million - $79 million) to Participants. With respect to losses arising out of Participant B's default, DTC would not apply a Corporate Contribution since it would have already contributed the maximum Corporate Contribution of 50% of its General Business Risk Capital Requirement. DTC would allocate the loss of $350 million arising out of Participant B's default to Participants. Because Participant X was a Participant on the first day of the Event Period, it would be subject to loss allocation with respect to all events occurring during the Event Period, even if the event occurred after its retirement. Therefore, Participant X would be subject to loss allocation with respect to Participant B's default. Altogether, with respect to the losses arising out of defaults of Participant A and Participant B, DTC would apply a Corporate Contribution of $79 million and allocate losses of $621 million to Participants. The principal differences in the above example are due to: (i) The proposed changes to the calculation and application of Corporate Contribution, and (ii) the proposed introduction of an Event Period. [[Page 34254]] E. Clarifying Changes Regarding Voluntary Retirement Section 1 of Rule 2 provides that a Participant may terminate its business with DTC by notifying DTC in the appropriate manner.\43\ To provide additional transparency to Participants with respect to the voluntary retirement of a Participant, and to align, where appropriate, with the proposed rule changes of NSCC and FICC with respect to voluntary termination, DTC is proposing to add proposed Section 6(a) to Rule 4, which would be titled, ``Upon Any Voluntary Retirement.'' Proposed Section 6(a) of Rule 4 would (i) clarify the requirements \44\ for a Participant that wants to voluntarily terminate its business with DTC, and (ii) address the situation where a Participant submits a Voluntary Retirement Notice (defined below) and subsequently receives a Settlement Charge Notice or the first Loss Allocation Notice in a round on or prior to the Voluntary Retirement Date (defined below). --------------------------------------------------------------------------- \43\ Section 1 of Rule 2 provides, in relevant part, that ``[a] Participant may terminate its business with the Corporation by notifying the Corporation as provided in Sections 7 or 8 of Rule 4 or, if for a reason other than those specified in said Sections 7 and 8, by notifying the Corporation thereof; the Participant shall, upon receipt of such notice by the Corporation, cease to be a Participant. In the event that a Participant shall cease to be a Participant, the Corporation shall thereupon cease to make its services available to the Participant, except that the Corporation may perform services on behalf of the Participant or its successor in interest necessary to terminate the business of the Participant or its successor with the Corporation, and the Participant or its successor shall pay to the Corporation the fees and charges provided by these Rules with respect to services performed by the Corporation subsequent to the time when the Participant ceases to be a Participant.'' Supra note 5. DTC is proposing to modify the provision to clarify that the termination would be subject to proposed Section 6 of Rule 4. \44\ The requirements would reflect current practice. --------------------------------------------------------------------------- Specifically, DTC is proposing that if a Participant elects to terminate its business with DTC pursuant to Section 1 of Rule 2 for reasons other than those specified in proposed Section 8 (a ``Voluntary Retirement''), the Participant would be required to: (1) Provide a written notice of such termination to DTC (``Voluntary Retirement Notice''), as provided for in Section 1 of Rule 2; (2) specify in the Voluntary Retirement Notice a desired date for the termination of its business with DTC (``Voluntary Retirement Date''); (3) cease all activities and use of DTC services other than activities and services necessary to terminate the business of the Participant with DTC; and (4) ensure that all activities and use of DTC services by the Participant cease on or prior to the Voluntary Retirement Date.\45\ --------------------------------------------------------------------------- \45\ Typically, a Participant would ultimately submit a notice after having ceased its transactions and transferred all securities out of its Account. --------------------------------------------------------------------------- Proposed Section 6(a) of Rule 4 would provide that if the Participant fails to comply with the requirements of proposed Section 6(a), its Voluntary Retirement Notice would be deemed void.\46\ --------------------------------------------------------------------------- \46\ The purpose of this proposed provision is to clarify that a failure of a Participant to comply with proposed Section 6(a) of Rule 4 would mean that the Participant would continue to be a Participant, as if the Voluntary Retirement Notice had not been received by DTC. For example, Participant A submits a Voluntary Retirement Notice to DTC on April 1st and indicates a Voluntary Retirement Date of April 15th, but fails to comply with the requirements of proposed Section 6(a) of Rule 4 by the Voluntary Retirement Date. The Participant would continue to be a Participant after the Voluntary Retirement Date. If an Event Period subsequently occurs before the Participant submits a new Voluntary Retirement Notice and voluntarily retires in compliance with proposed Section 6(a), such Participant would be obligated to pay its pro rata shares of losses and liabilities arising from that Event Period. --------------------------------------------------------------------------- Further, proposed Section 6(a) of Rule 4 would provide that if a Participant submits a Voluntary Retirement Notice and subsequently receives a Settlement Charge Notice or the first Loss Allocation Notice in a round on or prior to the Voluntary Retirement Date, such Participant must timely submit a Termination Notice in order to benefit from its Settlement Charge Cap or Loss Allocation Cap, as the case may be. In such a case, the Termination Notice would supersede and void the pending Voluntary Retirement Notice submitted by the Participant. F. Changes to the Retention Time for the Actual Participants Fund Deposit of a Former Participant Current Rule 4 provides that after three months from when a Person has ceased to be a Participant, DTC shall return to such Person (or its successor in interest or legal representative) the amount of the Actual Participants Fund Deposit of the former Participant plus accrued and unpaid interest to the date of such payment (including any amount added to the Actual Participants Fund Deposit of the former Participant through the sale of the Participant's Preferred Stock), provided that DTC receives such indemnities and guarantees as DTC deems satisfactory with respect to the matured and contingent obligations of the former Participant to DTC. Otherwise, within four years after a Person has ceased to be a Participant, DTC shall return to such Person (or its successor in interest or legal representative) the amount of the Actual Participants Fund Deposit of the former Participant plus accrued and unpaid interest to the date of such payment, except that DTC may offset against such payment the amount of any known loss or liability to DTC arising out of or related to the obligations of the former Participant to DTC. DTC is proposing to reduce the time, after a Participant ceases to be a Participant, at which DTC would be required to return the amount of the Actual Participants Fund Deposit of the former Participant plus accrued and unpaid interest, whether the Participant ceases to be such because it elected to terminate its business with DTC in response to a Settlement Charge Notice or Loss Allocation Notice or otherwise. Pursuant to the proposed rule change, the time period would be reduced from four (4) years to two (2) years. All other requirements relating to the return of the Actual Participants Fund Deposit would remain the same. The four (4) year retention period was implemented at a time when there were more deposits and processing of physical certificates, as well as added risks related to manual processing, and related claims could surface many years after an alleged event. DTC believes that the change to two (2) years is appropriate because, currently, as DTC and the industry continue to move toward automation and dematerialization, claims typically surface more quickly. Therefore, DTC believes that a shorter retention period of two (2) years would be sufficient to maintain a reasonable level of coverage for possible claims arising in connection with the activities of a former Participant, while allowing DTC to provide some relief to former Participants by returning their Actual Participants Fund Deposits more quickly. (ii) Proposed Rule Changes The foregoing changes as well as other changes (including a number of technical and conforming changes) that DTC is proposing in order to improve the transparency and accessibility of Rule 4 are described in detail below. A. Changes Relating to Participant Default, Pro Rata Settlement Charges and Loss Allocation Section 3 As discussed above, current Section 3 of Rule 4 provides that, if a Participant fails to satisfy an obligation to DTC, DTC may, in such order and in such amounts as DTC determines, apply the Actual Participants Fund Deposit of the defaulting Participant, Pledge the shares of Preferred Stock of the defaulting [[Page 34255]] Participant to its lenders as collateral security for a loan, and/or sell the shares of Preferred Stock of the defaulting Participant to other Participants. Pursuant to the proposed rule change, Section 3 would retain most of these provisions, with the following modifications: DTC proposes to add the term ``Participant Default'' in proposed Section 3 as a defined term for the failure of a Participant to satisfy an obligation to DTC, for drafting clarity and use in related provisions. The proposed rule change would reflect that the defined term ``Participant Default,'' referring to the failure of a Participant to satisfy any obligation to DTC, includes the failure of a Defaulting Participant to satisfy its obligations as provided in Rule 9(B). In addition, the proposed rule change clarifies that, in the case of a Participant Default, DTC would first apply the Actual Participants Fund Deposit of the Participant to any unsatisfied obligations, before taking any other actions. This proposed clarification would reflect the current practice of DTC, and would provide Participants with enhanced transparency into the actions DTC would take with respect to the Participants Fund deposits and Participants Investment of a Participant that has failed to satisfy its obligations to DTC. DTC proposes to correct the term ``End-of-Day Facility,'' to the existing defined term ``End-of-Day Credit Facility.'' DTC further proposes to clarify that, if DTC Pledges some or all of the shares of Preferred Stock of a Participant to its lenders as collateral security for a loan under the End-of-Day Credit Facility, DTC would apply the proceeds of such loan to the obligation the Participant had failed to satisfy, which is not expressly stated in current Section 3 of Rule 4. In addition, DTC is proposing to make three ministerial changes to enhance readability by: (i) Removing the duplicative ``in,'' in the phrase ``in such order and in such amounts,'' (ii) replacing the word ``eliminate'' with ``satisfy,'' and (iii) to conform to proposed changes, renumbering the list of actions that DTC may take when there is a Participant Default. DTC is also proposing to add the heading ``Application of Participants Fund Deposits and Preferred Stock Investments to Participant Default'' to Section 3. Section 4 and Section 5 As noted above, current Section 4 of Rule 4 provides that if DTC incurs a loss or liability which is not satisfied by charging the Participant responsible for the loss pursuant to Section 3 of Rule 4, then DTC may, in any order and in any amount as DTC may determine, in its sole discretion, to the extent necessary to satisfy such loss or liability, ratably apply some or all of the Actual Participants Fund Deposits of all other Participants to such loss or liability and/or charge the existing retained earnings and undivided profits of DTC. This provision relates to losses and liabilities that may be due to the failure of a Participant to satisfy obligations to DTC, if the Actual Participants Fund Deposit of that Participant does not fully satisfy the obligation, or to losses and liabilities for which no single Participant is obligated, i.e., a ``non-default loss.'' As discussed above, current Rule 4 currently provides a single set of tools and common processes for using the Participants Fund as both a liquidity resource and for the satisfaction of other losses and liabilities. The proposed rule change would provide separate liquidity and loss allocation provisions. More specifically, proposed Section 4 of Rule 4 would reflect the process for a ``pro rata settlement charge,'' the application of the Actual Participants Fund Deposits of non-defaulting Participants for liquidity purposes in order to complete settlement, when a Defaulting Participant fails to satisfy its settlement obligation and the amount charged to its Actual Participants Fund Deposit by DTC pursuant to Section 3 of Rule 4 is insufficient to complete settlement. Proposed Section 5 of Rule 4 would contain the proposed loss allocation provisions. Proposed Section 4 Pursuant to the proposed rule change, current Section 4 would be replaced in its entirety by proposed Section 4, and titled ``Application of Participants Fund Deposits of Non-Defaulting Participants.'' First, for clarity, proposed Section 4 would expressly state that ``[t]he Participants Fund shall constitute a liquidity resource which may be applied by the Corporation in such amounts as the Corporation shall determine, in its sole discretion, to fund settlement if there is a Defaulting Participant and the amount charged to the Actual Participants Fund Deposit of the Defaulting Participant pursuant to Section 3 of this Rule is not sufficient to complete settlement. In that case, the Corporation may apply the Actual Participants Fund Deposits of Participants other than the Defaulting Participant (each, a ``non-defaulting Participant'') as provided in this Section and/or apply such other liquidity resources as may be available to the Corporation from time to time, including the End-of-Day Credit Facility.'' Proposed Section 4 would retain the current principle that DTC must notify Participants and the Commission when it applies the Participants Fund deposits of non-defaulting Participants, by stating that if the Actual Participants Fund Deposits of non-defaulting Participants are applied to complete settlement, DTC must promptly notify each Participant and the Commission of the amount of the charge and the reasons therefor, and would define such notice as a Settlement Charge Notice. Proposed Section 4 would retain the current calculation of pro rata charges by providing that each non-defaulting Participant's pro rata share \47\ of any such application of the Participants Fund, defined as a ``pro rata settlement charge,'' would be equal to (i) its Required Participants Fund Deposit, as such Required Participants Fund Deposit was fixed on the Business Day of such application \48\ less its Additional Participants Fund Deposit, if any, on that day, divided by (ii) the sum of the Required Participants Fund Deposits of all non- defaulting Participants, as such Required Participants Fund Deposits were fixed on that day, less the sum of the Additional Participants Fund Deposits, if any, of such non-defaulting Participants on that day. --------------------------------------------------------------------------- \47\ See supra note 20. \48\ See supra note 21. --------------------------------------------------------------------------- Proposed Section 4 would also provide a period of time within which a Participant could notify DTC of its election to terminate its business with DTC and thereby cap its liability, by providing that a Participant would have a period of five (5) Business Days following the issuance of a Settlement Charge Notice (``Settlement Charge Termination Notification Period'') to notify DTC of its election to terminate its business with DTC pursuant to proposed Section 8(a), and thereby benefit from its Settlement Charge Cap, as set forth in proposed Section 8(a).\49\ Proposed Section 4 would also require that any Participant that gives DTC notice of its election to terminate its business with DTC must comply with proposed Section 6(b) of Rule 4,\50\ and if it does not, its election to terminate would be deemed void. --------------------------------------------------------------------------- \49\ See supra note 22. \50\ Proposed Section 6(b) is discussed below. --------------------------------------------------------------------------- Proposed Section 4 would further provide that DTC may retain the entire amount of the Actual Participants Fund Deposit of a Participant subject to a pro rata settlement charge, up to the amount of the Participant's Settlement Charge [[Page 34256]] Cap in accordance with proposed Section 8(a) of Rule 4. Current Section 5 of Rule 4 provides that ``[e]xcept as provided in Section 8 of this Rule, if a pro rata charge is made pursuant to Section 4 of the current Rule against the Required Participants Fund Deposit of a Participant, and, as a consequence, the Actual Participants Fund Deposit of such Participant is less than its Required Participants Fund Deposit, the Participant shall, upon the demand of the Corporation, within such time as the Corporation shall require, Deposit to the Participants Fund the amount in cash needed to eliminate any resulting deficiency in its Required Participants Fund Deposit. If the Participant shall fail to make such deposit to the Participants Fund, the Corporation may take disciplinary action against the Participant pursuant to these Rules. Any disciplinary action which the Corporation takes pursuant to these Rules, or the voluntary or involuntary cessation of participation by the Participant, shall not affect the obligations of the Participant to the Corporation or any remedy to which the Corporation may be entitled under applicable law.'' Proposed Section 4 would incorporate current Section 5 of Rule 4, modified as follows: (i) Conformed to reflect the consolidation of Section 5 into proposed Section 4, (ii) replacement of ``Except as provided in'' with ``Subject to,'' to harmonize with language used elsewhere in proposed Rule 4, and (iii) corrections of two typographical errors, in order to accurately reflect that the Actual Participants Fund Deposit of a Participant would be applied, and not the Required Participants Fund Deposit, and to capitalize the word ``deposit'' because it is a defined term. Proposed Section 5 Proposed Section 5 of Rule 4 would address the substantially new and revised proposed loss allocation, which would apply to losses and liabilities relating to or arising out of a Default Loss Event or a Declared Non-Default Loss Event. Pursuant to the proposed rule change, DTC would restructure and modify its existing loss allocation waterfall as described below. The heading ``Loss Allocation Waterfall'' would be added to proposed Section 5. Proposed Section 5 would establish the concept of an ``Event Period'' to provide for a clear and transparent way of handling multiple loss events occurring in a period of ten (10) Business Days, which would be grouped into an Event Period. As stated above, both Default Loss Events and Declared Non-Default Loss Events could occur within the same Event Period. The Event Period with respect to a Default Loss Event would begin on the day on which DTC notifies Participants that it has ceased to act for the Participant (or the next Business Day, if such day is not a Business Day). In the case of a Declared Non-Default Loss Event, the Event Period would begin on the day that DTC notifies Participants of the Declared Non-Default Loss Event (or the next Business Day, if such day is not a Business Day). Proposed Section 5 would provide that if a subsequent Default Loss Event or Declared Non-Default Loss Event occurs during an Event Period, any losses or liabilities arising out of or relating to any such subsequent event would be resolved as losses or liabilities that are part of the same Event Period, without extending the duration of such Event Period. As proposed, each CTA Participant would be obligated to DTC for the entire amount of any loss or liability incurred by DTC arising out of or relating to any Default Loss Event with respect to such CTA Participant. Under the proposal, to the extent that such loss or liability is not satisfied pursuant to proposed Section 3 of Rule 4, DTC would apply a Corporate Contribution thereto and charge the remaining amount of such loss or liability as provided in proposed Section 5. Under proposed Section 5, the loss allocation waterfall would begin with a new mandatory Corporate Contribution from DTC. Rule 4 currently provides that the use of any retained earnings and undivided profits by DTC is a voluntary contribution of a discretionary amount of its retained earnings. Proposed Section 5 of Rule 4 would, instead, require a defined corporate contribution to losses and liabilities that are incurred by DTC with respect to an Event Period. As proposed, the Corporate Contribution to losses or liabilities that are incurred by DTC with respect to an Event Period would be defined as an amount that is equal to fifty percent (50%) of the amount calculated by DTC in respect of its General Business Risk Capital Requirement as of the end of the calendar quarter immediately preceding the Event Period.\51\ DTC's General Business Risk Capital Requirement, as defined in DTC's Clearing Agency Policy on Capital Requirements,\52\ is, at a minimum, equal to the regulatory capital that DTC is required to maintain in compliance with Rule 17Ad-22(e)(15) under the Act.\53\ --------------------------------------------------------------------------- \51\ See supra note 26. \52\ See supra note 27. \53\ 17 CFR 240.17Ad-22(e)(15). --------------------------------------------------------------------------- If DTC applies the Corporate Contribution to a loss or liability arising out of or relating to one or more Default Loss Events or Declared Non-Default Loss Events relating to an Event Period, then for any subsequent Event Periods that occur during the next two hundred fifty (250) Business Days, the Corporate Contribution would be reduced to the remaining unused portion of the Corporate Contribution amount that was applied for the first Event Period.\54\ Proposed Section 5 would require DTC to notify Participants of any such reduction to the Corporate Contribution. --------------------------------------------------------------------------- \54\ See supra note 30. --------------------------------------------------------------------------- Proposed Section 5 of Rule 4 would provide that nothing in the Rules would prevent DTC from voluntarily applying amounts greater than the Corporate Contribution against any DTC loss or liability, if the Board of Directors, in its sole discretion, believes such to be appropriate under the factual situation existing at the time. Proposed Section 5 of Rule 4 would provide that DTC shall apply the Corporate Contribution to losses and liabilities that arise out of or relate to one or more Default Loss Events and/or Declared Non-Default Loss Events that occur within an Event Period. The proposed rule change also provides that if losses and liabilities with respect to such Event Period remain unsatisfied following application of the Corporate Contribution, DTC would allocate such losses and liabilities to Participants, as described below. Proposed Section 5 of Rule 4 would state that each Participant that is a Participant on the first day of an Event Period would be obligated to pay its pro rata share of losses and liabilities arising out of or relating to each Default Loss Event (other than a Default Loss Event with respect to which it is the CTA Participant) and each Declared Non- Default Loss Event occurring during the Event Period. In addition, proposed Section 5 of Rule 4 would make it clear that any CTA Participant for which DTC ceases to act on a non-Business Day, triggering an Event Period that commences on the next Business Day, would be deemed to be a Participant on the first day of that Event Period. In addition, DTC is proposing to clarify that after a first round of loss allocations with respect to an Event Period, only Participants that have not submitted a Termination Notice in accordance with proposed Section 6(b) of Rule 4 would be subject to loss allocations with respect to subsequent rounds relating to that Event Period. The proposed change would also provide that DTC may retain the entire Actual Participants Fund [[Page 34257]] Deposit of a Participant subject to loss allocation, up to the Participant's Loss Allocation Cap in accordance with proposed Section 8(b) of Rule 4. Pursuant to the proposed rule change, DTC would notify Participants subject to loss allocation of the amounts being allocated to them by a Loss Allocation Notice in successive rounds of loss allocations. Proposed Section 5 would state that a loss allocation ``round'' would mean a series of loss allocations relating to an Event Period, the aggregate amount of which is limited by the sum of the Loss Allocation Caps of affected Participants (a ``round cap''). When the aggregate amount of losses allocated in a round equals the round cap, any additional losses relating to the applicable Event Period would be allocated in one or more subsequent rounds, in each case subject to a round cap for that round. DTC may continue the loss allocation process in successive rounds until all losses from the Event Period are allocated among Participants that have not submitted a Termination Notice in accordance with proposed Section 6(b) of Rule 4. Each Loss Allocation Notice would specify the relevant Event Period and the round to which it relates. The first Loss Allocation Notice in any first, second, or subsequent round would expressly state that such Loss Allocation Notice reflects the beginning of the first, second, or subsequent round, as the case may be, and that each Participant in that round has five (5) Business Days from the issuance of such first Loss Allocation Notice for the round \55\ to notify DTC of its election to terminate its business with DTC pursuant to proposed Section 8(b) of Rule 4, and thereby benefit from its Loss Allocation Cap.\56\ --------------------------------------------------------------------------- \55\ i.e., the Loss Allocation Termination Notification Period for that round. \56\ See supra note 37. --------------------------------------------------------------------------- Loss allocation obligations would continue to be calculated based upon a Participant's pro rata share of the loss.\57\ As proposed, each Participant's pro rata share of losses and liabilities to be allocated in any round would be equal to (i) (A) its Required Participants Fund Deposit, as such Required Participants Fund Deposit was fixed on the first day of the Event Period,\58\ less (B) its Additional Participants Fund Deposit, if any, on such day, divided by (ii) (A) the sum of the Required Participants Fund Deposits of all Participants subject to loss allocation in such round, as such Required Participants Fund Deposits were fixed on such day, less (B) the sum of any Additional Participants Fund Deposits, if any, of all Participants subject to loss allocation in such round on such day.\59\ --------------------------------------------------------------------------- \57\ See supra note 20. \58\ See supra note 21. \59\ See supra note 16. --------------------------------------------------------------------------- As proposed, Participants would have two (2) Business Days after DTC issues a first round Loss Allocation Notice to pay the amount specified in any such notice. In contrast to the current Section 4, under which DTC may apply the Actual Participants Fund Deposits of Participants directly to the satisfaction of loss allocation amounts, under proposed Section 5, DTC would require Participants to pay their loss allocation amounts (leaving their Actual Participants Fund Deposits intact).\60\ On a subsequent round (i.e., if the first round did not cover the entire loss of the Event Period because DTC was only able to allocate up to the sum of the Loss Allocation Caps of those Participants included in the round), Participants would also have two (2) Business Days after notice by DTC to pay their loss allocation amounts (again subject to their Loss Allocation Caps), unless a Participant timely notified (or will timely notify) DTC of its election to terminate its business with DTC with respect to a prior loss allocation round. --------------------------------------------------------------------------- \60\ See supra note 36. --------------------------------------------------------------------------- Under the proposal, if a Participant fails to make its required payment in respect of a Loss Allocation Notice by the time such payment is due, DTC would have the right to proceed against such Participant as a Participant that has failed to satisfy an obligation in accordance with proposed Section 3 of Rule 4 described above. For additional clarity, proposed Section 5 of Rule 4 would state that all amounts due from a Participant pursuant to proposed Section 5 of Rule 4 may be debited from the Settlement Account of such Participant. Proposed Section 5 of Rule 4 would also provide that DTC may retain the entire Actual Participants Fund Deposit of a Participant subject to loss allocation, up to the Participant's Loss Allocation Cap in accordance with Section 8(b) of Rule 4. Participants that wish to terminate their business with DTC would be required to comply with the requirements in proposed Section 6(b) of Rule 4, described further below. Specifically, proposed Section 5 would provide that if, after notifying DTC of its election to terminate its business with DTC pursuant to proposed Section 8(b) of Rule 4, the Participant fails to comply with the provisions of proposed Section 6(b) of Rule 4, its notice of termination would be deemed void and any further losses resulting from the applicable Event Period may be allocated against it as if it had not given such notice. Section 6 Section 6 of Rule 4 currently provides that whenever a Participant ceases to be such, it continues to be obligated (a) to satisfy any deficiency in the amount of its Required Participants Fund Deposit and/ or Required Preferred Stock Investment that it did not satisfy prior to such time, including (i) any deficiency resulting from a pro rata charge with respect to which the Participant has given notice to DTC of its election to terminate its business with DTC pursuant to Section 8 of Rule 4 and (ii) any deficiency the Participant is required to satisfy pursuant to Sections 3 (an obligation that a Participant failed to satisfy) or 5 (the requirement of a Participant to eliminate the deficiency in its Required Participants Fund Deposit) of Rule 4 and (b) to discharge any liability of the Participant to DTC resulting from the transactions of the Participant open at the time it ceases to be a Participant or on account of transactions occurring while it was a Participant. The heading ``Obligations of Participant Upon Termination'' would be added to Section 6 of Rule 4. As discussed above, DTC is proposing to add proposed Section 6(a) to Rule 4, which would (i) clarify the requirements for the Voluntary Retirement of a Participant, and (ii) address the situation where a Participant submits a Voluntary Retirement Notice and subsequently receives a Settlement Charge Cap or the first Loss Allocation Notice in a round on or prior to the Voluntary Retirement Date. Proposed Section 6(a) of Rule 4 would also provide that if a Participant submits a Voluntary Retirement Notice and subsequently receives a Settlement Charge Notice or the first Loss Allocation Notice in a round on or prior to the Voluntary Retirement Date, such Participant must timely submit a Termination Notice in order to benefit from its Settlement Charge Cap or Loss Allocation Cap, respectively. In such a case, the Termination Notice would supersede and void the pending Voluntary Retirement Notice submitted by the Participant. DTC is proposing to add Proposed Section 6(b), titled ``Upon Termination Following Settlement Charge or Loss Allocation.'' Proposed Section 6(b) would state that if a Participant timely notifies DTC of its election to terminate its business with DTC in respect of a pro rata settlement charge as set forth in proposed Section 4 of Rule 4 or a loss allocation as set forth in proposed [[Page 34258]] Section 5 of Rule 4, defined as a ``Termination Notice'', the Participant would be required to: (1) Specify in the Termination Notice a Participant Termination Date, which date shall be no later than ten Business Days following the last day of the applicable Settlement Charge Termination Notification Period or Loss Allocation Termination Notification Period; (2) cease all activities and use of the Corporation's services other than activities and services necessary to terminate the business of the Participant with DTC; and (3) ensure that all activities and use of DTC services by such Participant cease on or prior to the Participant Termination Date. Proposed Section 6(b) of Rule 4 would provide that a Participant that terminates its business with DTC in compliance with proposed Section 6(b) would remain obligated for its pro rata share of losses and liabilities with respect to any Event Period for which it is otherwise obligated; however, its aggregate obligation would be limited to the amount of its Loss Allocation Cap (as fixed in the round for which it withdrew). DTC is proposing to include a sentence in proposed Section 6(b) to make it clear that if the Participant fails to comply with the requirements set forth in this section, its Termination Notice will be deemed void, and the Participant will remain subject to further pro rata settlement charges pursuant to proposed Section 4 of Rule 4 or loss allocations pursuant to proposed Section 5 of Rule 4, as applicable, as if it had not given such notice. For clarity, DTC is proposing to consolidate the requirements from current Section 6 of Rule 4 into proposed Section 6(c) of Rule 4, titled ``After Any Termination,'' and modify them to conform to other proposed rule changes. In particular, DTC is proposing to clarify that a Participant that ceases to be such would continue to be subject to proposed Section 5 of Rule 4 for any Event Period for which it was a Participant on the first day of the Event Period. Proposed Section 6(c) of Rule 4 would state that whenever a Participant ceases to be such, it would continue to be obligated (i) to satisfy any deficiency in the amounts of its Required Participants Fund Deposit and/or Required Preferred Stock Investment that it did not satisfy prior to such time, including any deficiency the Participant is required to satisfy pursuant to proposed Sections 3 or 4 of Rule 4, (ii) subject to proposed Section 8, to satisfy any loss allocation pursuant to proposed Section 5 of Rule 4, and (iii) to discharge any liability of the Participant to DTC resulting from the transactions of the Participant open at the time it ceases to be a Participant or on account of transactions occurring while it was a Participant. Section 8 Pursuant to the proposed rule change, Section 8 would be titled ``Termination; Obligation for Pro Rata Settlement Charges and Loss Allocations,'' and would be divided among proposed Section 8(a) ``Settlement Charges,'' proposed Section 8(b) ``Loss Allocations,'' proposed Section 8(c) ``Maximum Obligation,'' and proposed Section 8(d) ``Obligation to Replenish Deposit.'' Pursuant to proposed Section 8(a), if a Participant, within five (5) Business Days after issuance of a Settlement Charge Notice pursuant to proposed Section 4 of Rule 4, gives notice to DTC of its election to terminate its business with DTC, the Participant would remain obligated for (i) its pro rata settlement charge that was the subject of such Settlement Charge Notice and (ii) all other pro rata settlement charges made by DTC until the Participant Termination Date. Subject to proposed Section 8(c), the terminating Participant's obligation would be limited to the amount of its Aggregate Required Deposit and Investment, as fixed on the day of the pro rata settlement charge that was the subject of the Settlement Charge Notice, plus 100% of the amount thereof, which is substantively the same limitation as provided for pro rata charges in current Section 8 of Rule 4.\61\ --------------------------------------------------------------------------- \61\ See supra note 24. --------------------------------------------------------------------------- Pursuant to proposed Section 8(b), if a Participant, within five (5) Business Days after the issuance of a first Loss Allocation Notice for any round pursuant to proposed Section 5 of Rule 4 gives notice to DTC of its election to terminate its business with DTC, the Participant would remain liable for (i) the loss allocation that was the subject of such notice and (ii) all other loss allocations made by DTC with respect to the same Event Period. Subject to proposed Section 8(c), the obligation of a Participant which elects to terminate its business with DTC would be limited to the amount of its Aggregate Required Deposit and Investment, as fixed on the first day of the Event Period, plus 100% of the amount thereof, which is substantively the same limitation as provided for pro rata charges in current Section 8 of Rule 4.\62\ --------------------------------------------------------------------------- \62\ See supra note 39. --------------------------------------------------------------------------- Proposed Section 8(c) would provide that under no circumstances would the aggregate obligation of a Participant under proposed Section 8(a) and proposed Section 8(b) exceed the amount of its Aggregate Required Deposit and Investment, as fixed on the earlier of the (i) day of the pro rata settlement charge that was the subject of the Settlement Charge Notice giving rise to a Termination Notice, and (ii) first day of the Event Period that was the subject of the first Loss Allocation Notice in a round giving rise to a Termination Notice, plus 100% of the amount thereof. The purpose of proposed Section 8(c) is to address a situation where a Participant could otherwise be subject to both a Settlement Charge Cap and Loss Allocation Cap. Proposed Section 8(d) would retain the last paragraph in current Section 8 of Rule 4, replacing ``pro rata charge'' with ``pro rata settlement charge'' and'' loss allocation.'' \63\ Proposed Section 8(d) would provide that if the amount of the Actual Participants Fund Deposit of a Participant is insufficient to satisfy a pro rata settlement charge pursuant to proposed Section 4 and proposed Section 8(a) or a loss allocation pursuant to proposed Section 5 and proposed Section 8(b), the Participant would be obligated to Deposit the amount of any such deficiency to the Participants Fund notwithstanding the fact that the Participant subsequently ceases to be a Participant. --------------------------------------------------------------------------- \63\ This is a ministerial change because this paragraph currently applies to current Section 4 of Rule 4, which includes charges to complete settlement and for loss allocation, as would be provided in proposed Section 4 and proposed Section 5 of Rule 4. --------------------------------------------------------------------------- Section 9 Pursuant to the proposed rule change, proposed Section 9 of Rule 4 would provide that the recovery and repayment provisions in current Rule 4 apply to both pro rata settlement charges and loss allocations.\64\ Specifically, proposed Section 9 would provide that if an amount is charged ratably pursuant to proposed Section 4 or allocated ratably pursuant to proposed Section 5 and such amount is recovered by DTC, in whole or in part, the net amount of the recovery shall be repaid ratably (on the same basis that it was originally charged or allocated) to the Persons against which the amount was originally charged or allocated by [[Page 34259]] (i) crediting the appropriate amounts to the Actual Participants Fund Deposits of Persons which are still Participants and (ii) paying the appropriate amounts in cash to Persons which are not still Participants. In addition, proposed Section 9 would clarify that no loss allocation under proposed Rule 4 would constitute a waiver of any claim DTC may have against a Participant for any losses or liabilities to which the Participant is subject under DTC Rules and Procedures, including, without limitation, any loss or liability to which it may be subject under proposed Rule 4. --------------------------------------------------------------------------- \64\ This is a ministerial change because Section 9 currently applies to current Section 4 of Rule 4, which includes charges to complete settlement and for loss allocation, as would be provided in proposed Section 4 and proposed Section 5 of Rule 4. --------------------------------------------------------------------------- DTC further proposes to add the heading ``No Waiver; Recovery and Repayment'' to proposed Section 9. B. Other Proposed Clarifying, Conforming and Technical Changes to Rule 4 Section 1 Section 1(a) and Section 1(b). Section 1(a) addresses, among other things, the formula for determining the Required Participants Fund Deposits of Participants. DTC is proposing to insert the words ``or wind-down'' to make it clear that the formulas for determining the Required Participants Fund Deposits of Participants and the amount of the minimum Required Participants Fund Deposit would be fixed by DTC so as to assure that the aggregate amount of Required Participants Fund Deposits of Participants will be increased to provide for the costs and expenses incurred by it incidental to the wind-down of DTC, in addition to the voluntary liquidation of DTC.\65\ Further, DTC proposes to delete the extraneous phrase ``if any.'' For increased clarity and readability, DTC is proposing to consolidate Section 1(b) into Section 1(a), and to relocate the sentences ``The Corporation may require a Participant to Deposit an additional amount to the Participants Fund pursuant to Section 2 of Rule 9(A). Any such additional amount shall be part of the Required Participants Fund Deposit of such Participant.'' from Section 1(a) to a new proposed Section 1(b). In addition to the relocation, DTC would add a defined term for such additional amount, as ``Additional Participants Fund Deposit,'' for drafting convenience and transparency throughout proposed Rule 4. Further, DTC proposes to add the headings ``Required Participants Fund Deposits'' and ``Additional Participants Fund Deposits'' to Section 1(a) and proposed Section 1(b), respectively. --------------------------------------------------------------------------- \65\ On December 18, 2017, DTC submitted a proposed rule change and advance notice to adopt the Recovery & Wind-down Plan of DTC, and amend the Rules in order to adopt Rule 32(A) (Wind-down of the Corporation) and Rule 38 (Market Disruption and Force Majeure). See Securities Exchange Act Release Nos. 82432 (January 2, 2018), 83 FR 884 (January 8, 2018) (SR-DTC-2017-021) and 82579 (January 24, 2018), 83 FR 4310 (January 30, 2018) (SR-DTC-2017-803). On June 28, 2018, DTC filed amendments to the proposed rule change and advance notice with the Commission and the Board of Governors of the Federal Reserve System, respectively, available at http://www.dtcc.com/legal/sec-rule-filings.aspx. --------------------------------------------------------------------------- Section 1(c). For enhanced readability, DTC is proposing to add the heading ``Voluntary Participants Fund Deposits'' to Section 1(c) of Rule 4, and to replace the word ``as'' with ``in the manner.'' Section 1(d). For enhanced clarity, DTC is proposing to modify Section 1(d) to make it clear that any Additional Participants Fund Deposit is required to be in cash. DTC is also proposing to delete the extraneous phrase ``pursuant to this Section'' and to replace language regarding Section 2 of Rule 9(A) with the proposed defined term ``Additional Participants Fund Deposit.'' Further, DTC proposes to add the heading ``Cash Participants Fund'' to Section 1(d) of Rule 4. Section 1(e). For enhanced clarity, DTC is proposing to add the language ``among Account Families'' to clarify the scope of the allocation described in Section 1(e). In addition, DTC proposes to add the heading ``Allocation of Participants Fund Deposits Among Account Families'' to Section 1(e) of Rule 4. Section 1(f). Section 1(f) addresses, among other things, the permitted use of the Participants Fund. For consistency with the balance of Section 1(f), the first paragraph would be amended to state that the Actual Participants Fund Deposits of Participants ``may be used or invested'' instead of stating ``shall be applied.'' Section 1(f) provides, in part, that the Participants Fund is limited to the satisfaction of losses or liabilities of DTC incident to the business of DTC. Section 1(f) currently defines ``business'' with respect to DTC as ``the doing of all things in connection with or relating to [DTC's] performance of the services specified in the first and second paragraphs of Rule 6 or the cessation of such services.'' For enhanced transparency of the permitted uses of the Participants Fund, proposed Section 1(f) would be amended to explicitly state that the Actual Participants Fund Deposits of Participants may be used (i) to satisfy the obligations of Participants to DTC, as provided in proposed Section 3, (ii) to fund settlement among non-defaulting Participants, as provided in proposed Section 4 and (iii) to satisfy losses and liabilities of DTC incident to the business of DTC, as provided in proposed Section 5. Section 1(f) would also be amended to make the definition of ``business'' applicable to the entirety of Rule 4, instead of just Section 1(f), as the term would appear elsewhere in the rule pursuant to the proposed rule change. In addition, DTC proposes to add the heading ``Maintenance, Permitted Use and Investment of Participants Fund'' to Section 1(f) of Rule 4. Section 1(g) (consolidated into proposed Section 1(f)). Pursuant to the proposed rule change, DTC would consolidate current Section 1(g) into proposed Section 1(f), and modify language to make it clear that DTC may invest cash in the Participants Fund in accordance with the Clearing Agency Investment Policy adopted by DTC.\66\ Further, language would be streamlined by replacing ``securities, repurchase agreements or deposits'' with ``financial assets,'' and ``securities and repurchase agreements in which such cash is invested'' with ``its investment of such cash.'' --------------------------------------------------------------------------- \66\ See Securities Exchange Act Release No. 79528 (December 12, 2016), 81 FR 91232 (December 16, 2016) (SR-DTC-2016-007). The Clearing Agency Investment Policy (the ``Policy'') governs the management, custody, and investment of cash deposited to the Participants Fund, the proprietary liquid net assets (cash and cash equivalents) of DTC and other funds held by DTC. The Policy sets forth guiding principles for the investment of those funds, which include adherence to a conservative investment philosophy that places the highest priority on maximizing liquidity and avoiding risk, as well as mandating the segregation and separation of funds. The Policy also addresses the process for evaluating credit ratings of counterparties and identifies permitted investments within specified parameters. In general, assets are required to be held by regulated and creditworthy financial institution counterparties and invested in financial instruments that, with respect to the Participants Fund, may include deposits with banks, including the Federal Reserve Bank of New York, collateralized reverse-repurchase agreements, direct obligations of the U.S. government and money- market mutual funds. --------------------------------------------------------------------------- Section 1(h) (proposed Section 1(g)). As discussed above, DTC is proposing to replace ``four'' years with ``two'' years, in order to reduce the time within which DTC would be required to return the Actual Participants Fund Deposit of a former Participant. In addition, DTC is proposing to (i) add the heading ``Return of Participants Fund Deposits to Participants'' to proposed Section 1(g), (ii) update a cross reference, and (iii) correct two typographical errors. Section 2 Pursuant to the proposed rule change, Section 2 of Rule 4 would be titled ``Participants Investment.'' Section 2(a)-2(d) (Proposed Section 2(a)). For clarity, DTC is proposing to consolidate Sections 2(b)-2(d) into proposed Section 2(a) and would add [[Page 34260]] the heading ``Required Preferred Stock Investments'' to proposed Section 2(a). In addition, DTC proposes to modify certain language to update references and cross-references to specific subsections to reflect the proposed changes to the numbering of the subsections in proposed Section 2 of Rule 4. Section 2(e) (Proposed Section 2(b)). For enhanced clarity, DTC is proposing to add the language ``among Account Families'' to clarify the scope of the allocation described in proposed Section 2(b). In addition, DTC proposes to add the heading ``Allocation of Preferred Stock Investments Among Account Families'' to proposed Section 2(b) of Rule 4. Section 2(f) (Proposed Section 2(c)). DTC is proposing to add language to clarify that when any Pledge of a Preferred Stock Security Interest pursuant to proposed Section 2(c) of Rule 4 is made by appropriate entries on the books of DTC, the Rules, in addition to such entries, shall be deemed to be a security agreement for purposes of the New York Uniform Commercial Code. In addition, DTC proposes to update a cross-reference to proposed Section 2(c). In addition, DTC proposes to add the heading ``Security Interest in Preferred Stock Investments of Participants'' to proposed Section 2(c). Sections 2(g)-2(i) (Proposed Sections 2(d)-2(f)). DTC proposes to add the headings ``Dividends on Preferred Stock Investments of Participants,'' ``Sale of Preferred Stock Investments of Participants,'' and ``Permitted Transfers of Preferred Stock Investments of Participants'' to proposed Sections 2(d), 2(e), and 2(f), respectively. Proposed Sections 2(e) and 2(f) would be modified to update cross-references to certain subsections. In addition, proposed Section 2(f) would be modified to renumber paragraphs and internal lists for consistency with the numbering schemes in Rule 4. Section 7. For clarity, DTC is proposing to amend Section 7 of Rule 4 to (i) replace language referencing Additional Participants Fund Deposits with the proposed defined term, (ii) update cross-references to reflect proposed renumbering, and (iii) add the headings ``Increased Participants Fund Deposits and Preferred Stock Investments,'' ``Required Participants Fund Deposits,'' and ``Required Preferred Stock Investments'' to proposed Sections 7, 7(a) and 7(b) of Rule 4, respectively. C. Proposed Changes to Rule 1 DTC is proposing to amend Rule 1 (Definitions; Governing Law) to add cross-references to proposed terms that would be defined in Rule 4, and to delete one defined term. The defined terms to be added are: ``Additional Participants Fund Deposit,'' ``Corporate Contribution,'' ``CTA Participant,'' ``Declared Non-Default Loss Event,'' ``Default Loss Event,'' ``Event Period,'' ``Loss Allocation Cap,'' ``Loss Allocation Notice,'' ``Loss Allocation Termination Notification Period,'' ``Participant Default,'' ``Participant Termination Date,'' ``Settlement Charge Cap,'' ``Settlement Charge Notice,'' ``Settlement Charge Termination Notification Period,'' ``Termination Notice,'' ``Voluntary Retirement,'' Voluntary Retirement Date,'' and ``Voluntary Retirement Notice''. The term ``Section 8 Pro Rata Charge'' would be deleted from Rule 1, because it would be deleted from proposed Rule 4 as no longer necessary. D. Proposed Changes to Rule 2 Section 1. The proposed rule change would modify Section 1 of Rule 2 by adding ``subject to Section 6 of Rule 4'' to the end of the following provision: ``A Participant may terminate its business with the Corporation by notifying the Corporation as provided in Sections 7 or 8 of Rule 4 or, if for a reason other than those specified in said Sections 7 and 8, by notifying the Corporation thereof; the Participant shall, upon receipt of such notice by the Corporation, cease to be a Participant.'' DTC is proposing to add this language in order to clarify that the termination would be subject to the requirements in proposed Section 6 of Rule 4. Participant Outreach Beginning in August 2017, DTC has conducted outreach to Participants in order to provide them with advance notice of the proposed changes. As of the date of this filing, no written comments relating to the proposed changes have been received in response to this outreach. The Commission will be notified of any written comments received. Implementation Timeframe Pending Commission approval, DTC expects to implement this proposal within two (2) Business Days after approval. Participants would be advised of the implementation date of this proposal through issuance of a DTC Important Notice. 2. Statutory Basis DTC believes that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a registered clearing agency. Specifically, DTC believes that the proposed rule change is consistent with Section 17A(b)(3)(F) of the Act \67\ and Rules 17Ad-22(e)(7)(i), 17Ad-22(e)(13) and (e)(23)(i),\68\ each as promulgated under the Act, for the reasons described below. --------------------------------------------------------------------------- \67\ 15 U.S.C. 78q-1(b)(3)(F). \68\ 17 CFR 240.17Ad-22(e)(7)(i), (e)(13) and (e)(23)(i). --------------------------------------------------------------------------- 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.\69\ The proposed rule changes to (1) require a Corporate Contribution to a loss, (2) introduce an Event Period, and (3) introduce the concept of ``rounds'' (and accompanying Loss Allocation Notices) and apply this concept to the timing of loss allocation payments and the Participant termination process in connection with the loss allocation process, taken together, are intended to enhance the overall resiliency of DTC's loss allocation process --------------------------------------------------------------------------- \69\ 15 U.S.C. 78q-1(b)(3)(F). --------------------------------------------------------------------------- By replacing the discretionary application of DTC retained earnings to losses and liabilities with a mandatory and defined amount of the Corporate Contribution, the proposed rule change is designed to provide enhanced transparency and accessibility to Participants as to how much DTC would contribute in the event of a loss or liability. The proposed rule change also clarifies that the proposed Corporate Contribution would apply to both Default Loss Events and Declared Non-Default Loss Events. The proposed rule change would provide greater transparency as to the proposed replenishment period for the Corporate Contribution, which would allow Participants to better assess the adequacy of DTC's loss allocation process. Taken together, the proposed rule changes with respect to the Corporate Contribution would enhance the overall resiliency of DTC's loss allocation process by specifying the calculation and application of DTC's Corporate Contribution, including the proposed replenishment period, and would allow Participants to better assess the adequacy of DTC's loss allocation process. By introducing the concept of an Event Period, DTC would be able to group Default Loss Events and Declared Non-Default Loss Events occurring within a period of ten (10) Business [[Page 34261]] Days for purposes of allocating losses to Participants. DTC believes that the Event Period would provide a defined structure for the loss allocation process to encompass potential sequential Default Loss Events or Declared Non-Default Loss Events that may or may not be closely linked to an initial event and/or a market dislocation episode. Having this structure would enhance the overall resiliency of DTC's loss allocation process because the proposed rule would expressly address losses that may arise from multiple Default Loss Events and/or Declared Non-Default Loss Events that arise in quick succession. Moreover, the proposed Event Period structure would provide certainty for Participants concerning their maximum exposure to mutualized loss allocation with respect to such events. By introducing the concept of ``rounds'' (and accompanying Loss Allocation Notices) and applying this concept to the timing of loss allocation payments and the Participant termination process in connection with the loss allocation process, DTC would (i) set forth a defined amount that it would allocate to Participants during each round (i.e., the round cap), (ii) advise Participants of loss allocation obligation information as well as round information through the issuance of Loss Allocation Notices, and (iii) provide Participants with the option to limit their loss allocation exposure after the issuance of the first Loss Allocation Notice in each round. These proposed rule changes would enhance the overall resiliency of DTC's loss allocation process because they would expressly permit DTC to continue the loss allocation process in successive rounds until all of DTC's losses are allocated and enable DTC to identify continuing Participants for purposes of calculating subsequent loss allocation obligations in successive rounds. Moreover, the proposed rule changes would define for Participants a clear manner and process in which they could cap their loss allocation exposure to DTC. Taken together, the foregoing proposed rule changes would establish a stronger (for all the reasons discussed above) and clearer loss allocation process for DTC, which DTC believes would allow it to take timely action to address losses. The ability to timely address losses would allow DTC to continue to meet its clearance and settlement obligations, especially in circumstances that may involve a series of substantially contemporaneous loss events. Therefore, DTC believes that these 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. By reducing the time within which DTC is required to return the Actual Participants Fund Deposit of a former Participant, DTC would enable firms that have exited DTC to have access to their funds sooner than under current Rule 4 while maintaining the protection of DTC and its provision of clearance and settlement services. DTC would continue to be protected under the proposed rule change, which will maintain the provision that DTC may offset the return of funds against the amount of any loss or liability of DTC arising out of or relating to the obligations of the former Participant to DTC, and would provide that DTC could retain the funds for up to two (2) years. As such, DTC would maintain a necessary level of coverage for possible claims arising in connection with the DTC activities of a former Participant. Therefore, DTC believes that this proposed rule change would promote the prompt and accurate clearance and settlement of securities transactions, consistent with Section 17A(b)(3)(F) of the Act. The proposed rule changes to clarify the Voluntary Retirement of a Participant would improve the clarity of the Rule and help to ensure that DTC's Voluntary Retirement process is transparent and clear to Participants. Having clear Voluntary Retirement provisions would enable Participants to better understand the Voluntary Retirement process and provide Participants with increased predictability and certainty regarding their rights and obligations with respect to such process. Enabling Participants to readily understand DTC's Voluntary Retirement process and their rights and obligations in connection thereto would help a Participant that is voluntarily terminating its business with DTC, and the membership at large, to understand the point at which a Participant may no longer a Participant of DTC, and would thereby promote the prompt and accurate clearance and settlement of securities transactions, consistent with Section 17A(b)(3)(F) of the Act. Rule 17Ad-22(e)(7)(i) under the Act requires, in part, that DTC establish, implement, maintain and enforce written policies and procedures reasonably designed to effectively measure, monitor, and manage the liquidity risk that arises in or is borne by DTC, including measuring, monitoring, and managing its settlement and funding flows on an ongoing and timely basis, and its use of intraday liquidity, by maintaining sufficient liquid resources to effect same-day settlement of payment obligations with a high degree of confidence under a wide range of foreseeable stress scenarios.\70\ By clarifying the remedies available to DTC with respect to a Participant Default, including the application of the Participants Fund as a liquidity resource, and by clarifying and providing the related processes, the proposed rule change is designed so that DTC may manage its settlement and funding flows on a timely basis and apply the Participants Fund as a liquid resource in order to effect same day settlement of payment obligations with a high degree of confidence. Therefore, DTC believes that the proposed rule changes with respect to the application of the Actual Participants Fund Deposits of non-defaulting Participants to complete settlement are consistent with Rule 17Ad-22(e)(7)(i) under the Act. --------------------------------------------------------------------------- \70\ 17 CFR 240.17Ad-22(e)(7)(i). --------------------------------------------------------------------------- Rule 17Ad-22(e)(13) under the Act requires, in part, that DTC establish, implement, maintain and enforce written policies and procedures reasonably designed to ensure DTC has the authority and operational capacity to take timely action to contain losses and liquidity demands and continue to meet its obligations.\71\ The proposed rule changes to (1) require a defined Corporate Contribution to a loss, (2) introduce an Event Period, (3) introduce the concept of ``rounds'' (and accompanying Loss Allocation Notices) and apply this concept to the timing of loss allocation payments and the Participant termination process in connection with the loss allocation process, taken together, are designed to enhance the resiliency of DTC's loss allocation process. Having a resilient loss allocation process would help ensure that DTC can effectively and timely address losses relating to or arising out of Default Loss Events and/or Declared Non-Default Loss Events, which in turn would help DTC contain losses and continue to conduct its clearance and settlement business. In addition, by providing clarity as to the application of the Participants Fund to fund settlement in the event of a Participant Default, the proposed rule change is designed to clarify that DTC is authorized to use the Participants Fund to fund settlement. Therefore, DTC believes that the proposed rule changes to enhance the resiliency of DTC's loss allocation process, and to provide clarity as to the application of the Participants Fund to fund settlement, are consistent with Rule 17Ad- 22(e)(13) under the Act. --------------------------------------------------------------------------- \71\ Id. at 240.17Ad-22(e)(13). --------------------------------------------------------------------------- [[Page 34262]] Rule 17Ad-22(e)(23)(i) under the Act requires DTC to establish, implement, maintain and enforce written policies and procedures reasonably designed to publicly disclose all relevant rules and material procedures, including key aspects of DTC's default rules and procedures.\72\ The proposed rule changes to (i) separate the provisions for the use of the Participants Fund for settlement and for loss allocation, (ii) make clarifying changes to the provisions regarding the application of the Participants Fund to complete settlement and for the allocation of losses, (iii) further align the loss allocation rules of the DTCC Clearing Agencies, (iv) improve the overall transparency and accessibility of the provisions in the Rules governing loss allocation, and (v) make technical and conforming changes, would not only ensure that DTC's loss allocation rules are, to the extent practicable and appropriate, consistent with the loss allocation rules of the other DTCC Clearing Agencies, but also would help to ensure that DTC's loss allocation rules are transparent and clear to Participants. Aligning the loss allocation rules of the DTCC Clearing Agencies would provide consistent treatment, to the extent practicable and appropriate, especially for firms that are participants of two or more DTCC Clearing Agencies. Having transparent and clear loss allocation rules would enable Participants to better understand the key aspects of DTC's Rules and Procedures relating to Participant Default, as well as non-default events, and provide Participants with increased predictability and certainty regarding their exposures and obligations. As such, DTC believes that the proposed rule changes with respect to pro rata settlement charges, and to align the loss allocation rules across the DTCC Clearing Agencies and to improve the overall transparency and accessibility of DTC's loss allocation rules are consistent with Rule 17Ad-22(e)(23)(i) under the Act. --------------------------------------------------------------------------- \72\ Id. at 240.17Ad-22(e)(23)(i). --------------------------------------------------------------------------- The proposed rule changes to clarify the Voluntary Retirement of a Participant would improve the clarity of the Rules and help to ensure that DTC's Voluntary Retirement process is transparent and clear to Participants. Having clear Voluntary Retirement provisions would enable Participants to better understand the Voluntary Retirement process and provide Participants with increased predictability and certainty regarding their rights and obligations with respect to such process. As such, DTC believes that the proposed rule changes with respect to Voluntary Retirement are also consistent with Rule 17Ad-22(e)(23)(i) under the Act. (B) Clearing Agency's Statement on Burden on Competition DTC does not believe that the proposed rule changes to clarify the remedies available to DTC with respect to a Participant Default, including the application of the Participants Fund as a liquidity resource, and to clarify and provide the related processes, would impact competition.\73\ The proposed rule changes retain the existing core concepts of the pro rata use of the Participants Fund deposits of non-defaulting Participants to complete settlement when a Participant fails to settle, and does not materially change their rights to elect to terminate their business with DTC and limit their exposure to settlement charges. Based on the foregoing, DTC believes that the proposed rule changes relating to pro rata settlement charges would not have any impact on competition. --------------------------------------------------------------------------- \73\ 15 U.S.C. 78q-1(b)(3)(I). --------------------------------------------------------------------------- DTC believes that the proposed rule change to replace the discretionary application of DTC retained earnings to losses and liabilities with a mandatory and defined Corporate Contribution would impact competition, but would not impose a burden on competition.\74\ By requiring a defined corporate contribution to losses and liabilities that are incurred by DTC before the allocation of losses to Participants, the proposed rule change would relieve Participants of a defined amount of potential obligations, which would allow them to apply those resources elsewhere. Based on the foregoing, DTC believes that the proposed rule changes relating to the Corporate Contribution would not impose a burden on competition, but may promote competition. --------------------------------------------------------------------------- \74\ Id. --------------------------------------------------------------------------- DTC does not believe that the proposed rule changes to enhance the resiliency of DTC's loss allocation process would impact competition.\75\ As described above, the proposed rule changes to (1) introduce an Event Period, and (2) introduce the concept of ``rounds'' (and accompanying Loss Allocation Notices) and apply this concept to the timing of loss allocation payments and the Participant termination process in connection with the loss allocation process, taken together, are intended to enhance the overall resiliency of DTC's loss allocation process, and would apply equally to all Participants. Moreover, the proposed changes with respect to loss allocation retain the core concept of the allocation of losses and liabilities among Participants proportionally to the amount of risk that their activities present to DTC as measured by their Required Participants Fund Deposits.\76\ Since there would not be a change to the mutualized obligations with respect to a loss arising from a Default Loss Event or Declared Non-Default Loss Event, the proposed rule changes with respect to loss allocation would not substantively affect the rights and obligations of Participants. --------------------------------------------------------------------------- \75\ Id. \76\ Supra note 14. --------------------------------------------------------------------------- DTC believes that the proposed rule change to reduce the time after a Participant ceases to be a Participant within which DTC would be required to return the amount of the Actual Participants Fund Deposit of the former Participant may have an impact on competition, but would not impose a burden on competition.\77\ This proposed rule change is intended to enable firms who have exited DTC to have use of their funds sooner, while at the same time retaining the existing requirements around the return. The reduction of the applicable timeframe from four (4) years to two (2) years would improve systemic efficiency by releasing the resources of the former Participant sooner, allowing them to allocate those resources where needed. Based on the foregoing, DTC believes the proposed rule change to reduce the time within which DTC is required to return the Actual Participants Fund Deposit of a former Participant would not impose a burden on competition, but may promote competition. --------------------------------------------------------------------------- \77\ 15 U.S.C. 78q-1(b)(3)(I). --------------------------------------------------------------------------- DTC also does not believe that the proposed rule changes to (i) further align the loss allocation rules of the DTCC Clearing Agencies, (ii) increase the transparency and accessibility of provisions in the Rules governing loss allocation, and (iii) make technical and conforming changes, would impact competition.\78\ These changes would apply equally to all Participants. Further alignment of the loss allocation rules of the DTCC Clearing Agencies are intended to increase the consistency of the Rules with the rules of other DTCC Clearing Agencies in order to provide consistent treatment, to the extent practicable and appropriate, especially for firms that are participants of two or more DTCC Clearing Agencies. Having transparent and accessible provisions in the Rules governing loss allocation are intended to improve the readability and [[Page 34263]] clarity of the Rules regarding the loss allocation process. Clarifying DTC's Voluntary Retirement provisions would improve the clarity of the Rules and help ensure that DTC's Voluntary Retirement process is transparent and clear to all Participants. Making technical and conforming changes to ensure the Rules remain clear and accurate would facilitate Participants' understanding of the Rules and their obligations thereunder. As such, DTC believes that these proposed rule changes would not have any impact on competition. --------------------------------------------------------------------------- \78\ Id. --------------------------------------------------------------------------- (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. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing. 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-2017-022 on the subject line. Paper Comments Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090. All submissions should refer to File Number SR-DTC-2017-022. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's internet website (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the 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 website viewing and printing in the Commission's Public Reference Room, 100 F Street NE, Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of DTC and on DTCC's website (http://dtcc.com/legal/sec-rule-filings.aspx). All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-DTC-2017-022 and should be submitted on or before August 3, 2018. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\79\ --------------------------------------------------------------------------- \79\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2018-15364 Filed 7-18-18; 8:45 am] BILLING CODE 8011-01-P
![34246 Federal Register / Vol. 83, No. 139 / Thursday, July 19, 2018 / Notices
SECURITIES AND EXCHANGE the Commission designated a longer take timely action to contain multiple
COMMISSION period within which to approve, loss events that occur in succession
disapprove, or institute proceedings to during a short period of time. In
[Release No. 34–83629; File No. SR–DTC–
2017–022]
determine whether to approve or connection therewith, the proposed rule
disapprove the Proposed Rule Change.2 change would (i) align the loss
Self-Regulatory Organizations; The On March 20, 2018, the Commission allocation rules of the three clearing
Depository Trust Company; Notice of instituted proceedings to determine agencies of The Depository Trust &
Filing of Amendment No. 1 to a whether to approve or disapprove the Clearing Corporation (‘‘DTCC’’), namely
Proposed Rule Change To Amend the Proposed Rule Change; on June 25, DTC, National Securities Clearing
Loss Allocation Rules and Make Other 2018, the Commission designated a Corporation (‘‘NSCC’’), and Fixed
Changes longer period for Commission action on Income Clearing Corporation (‘‘FICC’’)
the proceedings to determine whether to
July 13, 2018. (collectively, the ‘‘DTCC Clearing
approve or disapprove the Proposed
On December 18, 2017, The Agencies’’), so as to provide consistent
Rule Change.3 On June 28, 2018, DTC
Depository Trust Company (‘‘DTC’’) filed Amendment No. 1 to the Proposed treatment, to the extent practicable and
filed with the Securities and Exchange Rule Change to amend and replace in its appropriate, especially for firms that are
Commission (‘‘Commission’’), pursuant entirety the Proposed Rule Change as participants of two or more DTCC
to Section 19(b)(1) of the Securities originally submitted on December 18, Clearing Agencies, (ii) increase
Exchange Act of 1934 (‘‘Act’’) and Rule 2017.4 As of the date of this release, the transparency and accessibility of the
19b–4 thereunder, proposed rule change Commission has not received any provisions relating to the use of the
SR–DTC–2017–022 (‘‘Proposed Rule comments on the Proposed Rule Participants Fund as a liquidity resource
Change’’) to amend the loss allocation Change. for settlement and the loss allocation
rules and make other changes; the The Proposed Rule Change, as provisions, by enhancing their
Proposed Rule Change was published amended by Amendment No. 1, is readability and clarity, (iii) require a
for comment in the Federal Register on described in Items I and II below, which defined corporate contribution to losses
January 8, 2018.1 On February 8, 2018, Items have been prepared by DTC. The and liabilities that are incurred by DTC
Commission is publishing this notice to prior to any allocation among
1 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b–4,
solicit comments on the Proposed Rule Participants, whether such losses and
respectively. Securities Exchange Act Release No. Change, as amended by Amendment No.
82426 (January 2, 2018), 83 FR 913 (January 8, liabilities arise out of Participant
2018) (SR–DTC–2017–022). On December 18, 2017, 1, from interested persons. defaults or due to non-default events,
DTC filed the Proposed Rule Change as advance (iv) reduce the time within which DTC
notice SR–DTC–2017–804 (‘‘Advance Notice’’) with
I. Clearing Agency’s Statement of the
the Commission pursuant to Section 806(e)(1) of Terms of Substance of the Proposed is required to return a former
Title VIII of the Dodd-Frank Wall Street Reform and Rule Change Participant’s Actual Participants Fund
Consumer Protection Act entitled the Payment,
The proposed rule change would Deposit, and (v) make conforming and
Clearing, and Settlement Supervision Act of 2010 technical changes. In addition, the
(‘‘Clearing Supervision Act’’) and Rule 19b– revise Rule 4 (Participants Fund and
4(n)(1)(i) of the Act. (12 U.S.C. 5465(e)(1) and 17 Participants Investment) to (i) provide proposed rule change would amend
CFR 240.19b–4(n)(1)(i), respectively.) On January separate sections for (x) the use of the Section 6 of Rule 4 to clarify the
30, 2018, the Commission published in the Federal requirements for a Participant that
Register notice of filing of the Advance Notice. The Participants Fund 5 as a liquidity
notice also extended the review period for the resource for settlement and (y) loss wants to voluntarily terminate its
Advance Notice pursuant to Section 806(e)(1)(H) of allocation among Participants of losses business with DTC, and to align, where
the Clearing Supervision Act. (12 U.S.C. appropriate, with the proposed
5465(e)(1)(H).) See Securities Exchange Act Release
and liabilities arising out of Participant
No. 82582 (January 24, 2018), 83 FR 4297 (January defaults or due to non-default events; voluntary termination provisions of the
30, 2018) (SR–DTC–2017–804). On April 10, 2018, and (ii) enhance the resiliency of DTC’s NSCC and FICC rules. The proposed
the Commission required additional information for loss allocation process so that DTC can rule change would also amend Rule 1
consideration of the Advance Notice, pursuant to (Definitions; Governing Law) to add
Section 806(e)(1)(D) of the Clearing Supervision
Act, which provided the Commission with an rules/sro/dtc-an.shtml. The proposal, as set forth in cross-references to terms that would be
additional 60-days in the review period beginning both the Advance Notice and the Proposed Rule defined in proposed Rule 4, and would
Change, shall not take effect until all required
on the date that the information requested is amend Rule 2 (Participants and
regulatory actions are completed.
received by the Commission. (12 U.S.C.
5465(e)(1)(D).) See Memorandum from the Office of
2 Securities Exchange Act Release No. 82670 Pledgees), in relevant part, to align with
Clearance and Settlement Supervision, Division of (February 8, 2018), 83 FR 6626 (February 14, 2018) proposed Section 6 of Rule 4, as
(SR–DTC–2017–022; SR–FICC–2017–022; SR–
Trading and Markets, titled ‘‘Commission’s Request
NSCC–2017–018).
discussed below.
for Additional Information,’’ available at http://
3 Securities Exchange Act Release No. 82914
www.sec.gov/rules/sro/dtc-an.shtml. On June 28, II. Clearing Agency’s Statement of the
2018, DTC filed Amendment No. 1 to the Advance (March 20, 2018), 83 FR 12978 (March 26, 2018)
(SR–DTC–2017–022); Securities Exchange Act Purpose of, and Statutory Basis for, the
Notice. To promote the public availability and
transparency of its post-notice amendment, DTC Release No. 83510 (June 25, 2018), 83 FR 30791 Proposed Rule Change
submitted a copy of Amendment No. 1 through the (June 29, 2018) (SR–DTC–2017–022; SR–FICC–
Commission’s electronic public comment letter 2017–022; SR–NSCC–2017–018). In its filing with the Commission, the
4 To promote the public availability and
mechanism. Accordingly, Amendment No. 1 to the clearing agency included statements
Advance Notice has been posted on the transparency of its post-notice amendment, DTC
submitted a copy of Amendment No. 1 through the
concerning the purpose of and basis for
Commission’s website at https://www.sec.gov/rules/
sro/dtc-an.htm and thus been publicly available Commission’s electronic public comment letter the proposed rule change and discussed
since June 29, 2018. On July 6, 2018, the mechanism. Accordingly, Amendment No. 1 to the any comments it received on the
sradovich on DSK3GMQ082PROD with NOTICES
Commission received the information requested, Proposed Rule Change has been posted on the proposed rule change. The text of these
which added an additional 60-days to the review Commission’s website at https://www.sec.gov/rules/
period pursuant to Sections 806(e)(1)(E) and (G) of sro/dtc.htm and thus been publicly available since statements may be examined at the
the Clearing Supervision Act. (12 U.S.C. June 29, 2018. places specified in Item III below. The
5465(e)(1)(E) and (G).) See Memorandum from the 5 Each capitalized term not otherwise defined
clearing agency has prepared
Office of Clearance and Settlement Supervision, herein has its respective meaning as set forth in the summaries, set forth in sections A, B,
Division of Trading and Markets, titled ‘‘Response Rules, By-Laws and Organization Certificate of DTC
to the Commission’s Request for Additional (‘‘Rules’’), available at http://www.dtcc.com/legal/ and C below, of the most significant
Information,’’ available at http://www.sec.gov/ rules-and-procedures.aspx. aspects of such statements.
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fails to settle,9 and for the satisfaction of liabilities incident to the business of with their Required Participants Fund
losses and liabilities due to Participant DTC.11 The proposed rule change would Deposits.14 A new provision would
defaults 10 or certain other losses or amend and add provisions to separate require DTC to contribute to a loss or
use of the Participants Fund as a liability, either arising from a
9 DTC is a central securities depository providing
liquidity resource to complete Participant default or non-default event,
key services that are structured to support daily settlement, reflected in proposed prior to any allocation among
settlement of book-entry transfers of securities, in
accordance with its Rules and Procedures. In Section 4 of Rule 4, and for loss Participants. The proposed rule change
particular, Rule 9(A) (Transactions in Securities and allocation, reflected in proposed Section would also introduce the new concepts
Money Payments), Rule 9(B) (Transactions in 5 of Rule 4. There wouldn’t be any of an ‘‘Event Period’’ and a ‘‘round’’ to
Eligible Securities), Rule 9(C) (Transactions in MMI substantive change to the rights and address the allocation of losses arising
Securities), Rule 9(D) (Settling Banks), and Rule
9(E) (Clearing Agency Agreements) provide the obligations of Participants under from multiple events that occur in
mechanism to achieve a ‘‘DVP Model 2 Deferred proposed Sections 4 and 5 of Rule 4.12 succession during a short period of
Net Settlement System’’ (as defined in Annex D of The proposed rule changes reinforce the time. These proposed rule changes
the Principles for Financial Market Infrastructures distinction, conceptual and sequential, would be substantially similar in these
issued by The Committee on Payments and Market
Infrastructures and the Technical Committee of the between the mechanisms to complete respects to analogous proposed rule
International Organization of Securities settlement on a Business Day and to changes for NSCC and FICC.
Commissions (April 2012), available at https:// mutualize losses that may result from a Current Rule 4 Provides for Application
www.bis.org/cpmi/publ/d101a.pdf. Briefly, in failure to settle, or other loss-generating
relevant part, Rule 9(B) provides that ‘‘[e]ach of the Participants Fund Through Pro
Participant and the Corporation shall settle the events. The change is also proposed so Rata Charges
balance of the Settlement Account of the Participant that the loss allocation provisions of
on a daily basis in accordance with these Rules and proposed Section 5 of Rule 4 more Current Rule 4 addresses the
the Procedures. Except as provided in the closely align to similar provisions of the Participants Fund and Participants
Procedures, the Corporation shall not be obligated
NSCC and FICC rules, to the extent Investment requirements and, among
to make any settlement payments to any other things, the permitted uses of the
Participants until the Corporation has received all appropriate.
of the settlement payments that Settling Banks and The proposed rule change would Participants Fund and Participants
Participants are required to make to the retain the core principles of current Investment.15 Pursuant to current Rule
Corporation.’’ Supra note 5. Pursuant to these
Rule 4 for both application of the 4, DTC maintains a cash Participants
provisions of Rule 9(B), securities will be delivered Fund. The Required Participants Fund
to Participants that satisfy their settlement Participants Fund as a liquidity resource
obligations in the end-of-day net settlement process. to complete settlement and for loss Deposit for any Participant is based on
10 The failure of a Participant to satisfy its the liquidity risk it poses to DTC
allocation, while clarifying or refining
settlement obligation constitutes a liability to DTC. relative to other Participants.
certain provisions and introducing
Insofar as DTC undertakes to complete settlement Default of a Participant. Under
among Participants other than the Participant that certain new concepts relating to loss current Section 3 of Rule 4, if a
failed to settle, that liability may give rise to losses allocation. In connection with the use of Participant is obligated to DTC and fails
as well. DTC is designed to provide settlement the Participants Fund as a liquidity
finality at the end of the day and notwithstanding to satisfy any obligation, DTC may, in
the failure to settle of a Participant or Affiliated
resource to complete settlement when a such order and in such amounts as DTC
Family of Participants with the largest net Participant fails to settle, the proposed shall determine in its sole discretion: (a)
settlement obligation, a ‘‘cover 1’’ standard. There rule would introduce the term ‘‘pro rata Apply some or all of the Actual
are no reversals of deliveries; a Participant that fails settlement charge,’’ for the use of the
to settle will not receive securities that were Participants Fund Deposit of such
intended to be delivered to it, because it has not
Participants Fund to complete Participant to such obligation; (b) Pledge
paid for them. These securities, among others, serve settlement as apportioned among non- some or all of the shares of Preferred
as collateral for DTC to use to secure a borrowing defaulting Participants. The existing Stock of such Participant to its lenders
of funds in order, in accordance with its Rules and term generically applied to such a use
Procedures, to settle with non-defaulting as collateral security for a loan under
Participants (including those delivering Participants
or to a loss allocation is simply a ‘‘pro the End-of-Day Credit Facility; 16 and/or
that delivered to the non-settling Participant). To rata charge’’.13 (c) sell some or all of the shares of
this end, delivery versus payment transactions For loss allocation, the proposed rule Preferred Stock of such Participant to
(‘‘DVP’’) will not be processed intraday to a change, like current Rule 4, would
receiving Participant that will incur a related other Participants (who shall be
payment obligation unless that Participant satisfies
continue to apply to both default and
risk management controls. The two risk non-default losses and liabilities, and, to 14 It may be noted that for NSCC and FICC, the
management controls are the Collateral Monitor and the extent allocated among Participants, proposed rule changes for loss allocation include a
Net Debit Cap. Net Debit Caps limit the potential would be charged ratably in accordance ‘‘look-back’’ period to calculate a member’s pro rata
settlement obligation of any Participant to an share and cap. The concept of a look-back or
amount for which DTC has sufficient liquidity average is already built into DTC’s calculation of
resources to cover this risk. The Collateral Monitor satisfy these liabilities. As to the Participants Fund Participants Fund requirements, which are based on
tests whether a Participant has sufficient collateral itself, DTC undertakes in Section 9 of existing and a rolling sixty (60) day average of a Participant’s six
for DTC to pledge or liquidate if that Participant proposed Rule 4, to restore funds to Participants highest intraday net debit peaks.
were to fail to meet its settlement obligation. To whose deposits may have been charged if there is 15 Each Participant is required to invest in DTC
process a DVP, the value of the delivery that is ultimately any excess recovery. It should be noted
Series A Preferred Stock, ratably on a basis
debited to the receiving Participant cannot cause that the Defaulting Participant remains principally
calculated in substantially the same manner as the
the net debit balance of the Participant to exceed obligated for all losses, costs and expenses Required Participants Fund Deposit. The Preferred
its Net Debit Cap, and the amount of the net debit associated with its Participant Default and, so, a Stock constitutes capital of DTC and is also
balance after giving effect to the debit must be fully recovery out of the estate of a Defaulting Participant available for use as provided in current and
collateralized. Accordingly, DTC may incur a is at least a hypothetical possibility. proposed Section 3 of Rule 4. This proposed rule
11 Section 1(f) of Rule 4 defines the term
liability or loss whenever it completes settlement change does not alter the Required Preferred Stock
despite the failure to settle of a Participant, or ‘‘business’’ with respect to DTC as ‘‘the doing of all Investment.
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Affiliated Family of Participants, because it is either things in connection with or relating to the 16 As part of its liquidity risk management regime,
using the Participants Fund deposits of other Corporation’s performance of the services specified DTC maintains a 364-day committed revolving line
Participants in the manner specified in existing and in the first and second paragraphs of Rule 6 or the of credit with a syndicate of commercial lenders,
proposed Rule 4 and/or borrowing the necessary cessation of such services.’’ Supra note 5. renewed every year. The committed aggregate
12 It may be noted that absent extreme
funds. DTC obligations under the line of credit amount of the End-of-Day Credit Facility (currently
include the obligation to pay interest on loans circumstances, DTC believes that it is unlikely that $1.9 billion) together with the Participants Fund
outstanding and to repay the loan; the Participants DTC would need to act under proposed Sections 4 constitute DTC’s liquidity resources for settlement.
Fund is designed as not only a direct liquidity or 5 of Rule 4. Based on these amounts, DTC sets Net Debit Caps
resource but as a back-up liquidity resource to 13 See Rule 4, Section 5, supra note 5. that limit settlement obligations.
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E. Clarifying Changes Regarding or prior to the Voluntary Retirement the former Participant plus accrued and
Voluntary Retirement Date.45 unpaid interest to the date of such
Section 1 of Rule 2 provides that a Proposed Section 6(a) of Rule 4 would payment, except that DTC may offset
Participant may terminate its business provide that if the Participant fails to against such payment the amount of any
with DTC by notifying DTC in the comply with the requirements of known loss or liability to DTC arising
appropriate manner.43 To provide proposed Section 6(a), its Voluntary out of or related to the obligations of the
additional transparency to Participants Retirement Notice would be deemed former Participant to DTC.
with respect to the voluntary retirement void.46 DTC is proposing to reduce the time,
Further, proposed Section 6(a) of Rule after a Participant ceases to be a
of a Participant, and to align, where
4 would provide that if a Participant Participant, at which DTC would be
appropriate, with the proposed rule
submits a Voluntary Retirement Notice required to return the amount of the
changes of NSCC and FICC with respect
and subsequently receives a Settlement Actual Participants Fund Deposit of the
to voluntary termination, DTC is
Charge Notice or the first Loss former Participant plus accrued and
proposing to add proposed Section 6(a)
Allocation Notice in a round on or prior unpaid interest, whether the Participant
to Rule 4, which would be titled, ‘‘Upon
to the Voluntary Retirement Date, such ceases to be such because it elected to
Any Voluntary Retirement.’’ Proposed
Participant must timely submit a terminate its business with DTC in
Section 6(a) of Rule 4 would (i) clarify
Termination Notice in order to benefit response to a Settlement Charge Notice
the requirements 44 for a Participant that
from its Settlement Charge Cap or Loss or Loss Allocation Notice or otherwise.
wants to voluntarily terminate its
Allocation Cap, as the case may be. In Pursuant to the proposed rule change,
business with DTC, and (ii) address the
such a case, the Termination Notice the time period would be reduced from
situation where a Participant submits a
would supersede and void the pending four (4) years to two (2) years. All other
Voluntary Retirement Notice (defined
Voluntary Retirement Notice submitted requirements relating to the return of
below) and subsequently receives a
by the Participant. the Actual Participants Fund Deposit
Settlement Charge Notice or the first
Loss Allocation Notice in a round on or F. Changes to the Retention Time for the would remain the same.
prior to the Voluntary Retirement Date Actual Participants Fund Deposit of a The four (4) year retention period was
(defined below). Former Participant implemented at a time when there were
Specifically, DTC is proposing that if Current Rule 4 provides that after more deposits and processing of
a Participant elects to terminate its three months from when a Person has physical certificates, as well as added
business with DTC pursuant to Section ceased to be a Participant, DTC shall risks related to manual processing, and
1 of Rule 2 for reasons other than those return to such Person (or its successor related claims could surface many years
specified in proposed Section 8 (a in interest or legal representative) the after an alleged event. DTC believes that
‘‘Voluntary Retirement’’), the amount of the Actual Participants Fund the change to two (2) years is
Participant would be required to: Deposit of the former Participant plus appropriate because, currently, as DTC
(1) Provide a written notice of such and the industry continue to move
accrued and unpaid interest to the date
termination to DTC (‘‘Voluntary toward automation and
of such payment (including any amount
Retirement Notice’’), as provided for in dematerialization, claims typically
added to the Actual Participants Fund
Section 1 of Rule 2; surface more quickly. Therefore, DTC
(2) specify in the Voluntary Deposit of the former Participant
through the sale of the Participant’s believes that a shorter retention period
Retirement Notice a desired date for the of two (2) years would be sufficient to
termination of its business with DTC Preferred Stock), provided that DTC
receives such indemnities and maintain a reasonable level of coverage
(‘‘Voluntary Retirement Date’’); for possible claims arising in connection
(3) cease all activities and use of DTC guarantees as DTC deems satisfactory
with respect to the matured and with the activities of a former
services other than activities and Participant, while allowing DTC to
services necessary to terminate the contingent obligations of the former
Participant to DTC. Otherwise, within provide some relief to former
business of the Participant with DTC; Participants by returning their Actual
and four years after a Person has ceased to
be a Participant, DTC shall return to Participants Fund Deposits more
(4) ensure that all activities and use of
such Person (or its successor in interest quickly.
DTC services by the Participant cease on
or legal representative) the amount of (ii) Proposed Rule Changes
43 Section 1 of Rule 2 provides, in relevant part, the Actual Participants Fund Deposit of
that ‘‘[a] Participant may terminate its business with The foregoing changes as well as other
the Corporation by notifying the Corporation as 45 Typically, a Participant would ultimately changes (including a number of
provided in Sections 7 or 8 of Rule 4 or, if for a technical and conforming changes) that
submit a notice after having ceased its transactions
reason other than those specified in said Sections
7 and 8, by notifying the Corporation thereof; the
and transferred all securities out of its Account. DTC is proposing in order to improve
Participant shall, upon receipt of such notice by the
46 The purpose of this proposed provision is to
the transparency and accessibility of
Corporation, cease to be a Participant. In the event clarify that a failure of a Participant to comply with Rule 4 are described in detail below.
that a Participant shall cease to be a Participant, the proposed Section 6(a) of Rule 4 would mean that
Corporation shall thereupon cease to make its the Participant would continue to be a Participant, A. Changes Relating to Participant
services available to the Participant, except that the as if the Voluntary Retirement Notice had not been
received by DTC. For example, Participant A
Default, Pro Rata Settlement Charges
Corporation may perform services on behalf of the
Participant or its successor in interest necessary to submits a Voluntary Retirement Notice to DTC on and Loss Allocation
terminate the business of the Participant or its April 1st and indicates a Voluntary Retirement Date
of April 15th, but fails to comply with the
Section 3
successor with the Corporation, and the Participant
or its successor shall pay to the Corporation the fees requirements of proposed Section 6(a) of Rule 4 by As discussed above, current Section 3
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and charges provided by these Rules with respect the Voluntary Retirement Date. The Participant
to services performed by the Corporation would continue to be a Participant after the
of Rule 4 provides that, if a Participant
subsequent to the time when the Participant ceases Voluntary Retirement Date. If an Event Period fails to satisfy an obligation to DTC,
to be a Participant.’’ Supra note 5. DTC is proposing subsequently occurs before the Participant submits DTC may, in such order and in such
to modify the provision to clarify that the a new Voluntary Retirement Notice and voluntarily amounts as DTC determines, apply the
termination would be subject to proposed Section retires in compliance with proposed Section 6(a),
6 of Rule 4. such Participant would be obligated to pay its pro
Actual Participants Fund Deposit of the
44 The requirements would reflect current rata shares of losses and liabilities arising from that defaulting Participant, Pledge the shares
practice. Event Period. of Preferred Stock of the defaulting
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Participant to its lenders as collateral charging the Participant responsible for Corporation from time to time,
security for a loan, and/or sell the shares the loss pursuant to Section 3 of Rule 4, including the End-of-Day Credit
of Preferred Stock of the defaulting then DTC may, in any order and in any Facility.’’
Participant to other Participants. amount as DTC may determine, in its Proposed Section 4 would retain the
Pursuant to the proposed rule change, sole discretion, to the extent necessary current principle that DTC must notify
Section 3 would retain most of these to satisfy such loss or liability, ratably Participants and the Commission when
provisions, with the following apply some or all of the Actual it applies the Participants Fund deposits
modifications: Participants Fund Deposits of all other of non-defaulting Participants, by
DTC proposes to add the term Participants to such loss or liability and/ stating that if the Actual Participants
‘‘Participant Default’’ in proposed or charge the existing retained earnings Fund Deposits of non-defaulting
Section 3 as a defined term for the and undivided profits of DTC. This Participants are applied to complete
failure of a Participant to satisfy an provision relates to losses and liabilities settlement, DTC must promptly notify
obligation to DTC, for drafting clarity that may be due to the failure of a each Participant and the Commission of
and use in related provisions. The Participant to satisfy obligations to DTC, the amount of the charge and the
proposed rule change would reflect that if the Actual Participants Fund Deposit reasons therefor, and would define such
the defined term ‘‘Participant Default,’’ of that Participant does not fully satisfy notice as a Settlement Charge Notice.
referring to the failure of a Participant the obligation, or to losses and liabilities Proposed Section 4 would retain the
to satisfy any obligation to DTC, for which no single Participant is current calculation of pro rata charges
includes the failure of a Defaulting obligated, i.e., a ‘‘non-default loss.’’ by providing that each non-defaulting
Participant to satisfy its obligations as As discussed above, current Rule 4 Participant’s pro rata share 47 of any
provided in Rule 9(B). In addition, the currently provides a single set of tools such application of the Participants
proposed rule change clarifies that, in and common processes for using the Fund, defined as a ‘‘pro rata settlement
the case of a Participant Default, DTC Participants Fund as both a liquidity charge,’’ would be equal to (i) its
would first apply the Actual resource and for the satisfaction of other Required Participants Fund Deposit, as
Participants Fund Deposit of the losses and liabilities. The proposed rule such Required Participants Fund
Participant to any unsatisfied change would provide separate liquidity Deposit was fixed on the Business Day
obligations, before taking any other and loss allocation provisions. More of such application 48 less its Additional
actions. This proposed clarification specifically, proposed Section 4 of Rule Participants Fund Deposit, if any, on
would reflect the current practice of 4 would reflect the process for a ‘‘pro that day, divided by (ii) the sum of the
DTC, and would provide Participants rata settlement charge,’’ the application Required Participants Fund Deposits of
with enhanced transparency into the of the Actual Participants Fund Deposits all non-defaulting Participants, as such
actions DTC would take with respect to of non-defaulting Participants for Required Participants Fund Deposits
the Participants Fund deposits and liquidity purposes in order to complete were fixed on that day, less the sum of
Participants Investment of a Participant settlement, when a Defaulting the Additional Participants Fund
that has failed to satisfy its obligations Participant fails to satisfy its settlement Deposits, if any, of such non-defaulting
to DTC. obligation and the amount charged to its Participants on that day.
DTC proposes to correct the term Actual Participants Fund Deposit by Proposed Section 4 would also
‘‘End-of-Day Facility,’’ to the existing DTC pursuant to Section 3 of Rule 4 is provide a period of time within which
defined term ‘‘End-of-Day Credit insufficient to complete settlement. a Participant could notify DTC of its
Facility.’’ DTC further proposes to Proposed Section 5 of Rule 4 would election to terminate its business with
clarify that, if DTC Pledges some or all contain the proposed loss allocation DTC and thereby cap its liability, by
of the shares of Preferred Stock of a provisions. providing that a Participant would have
Participant to its lenders as collateral Proposed Section 4 a period of five (5) Business Days
security for a loan under the End-of-Day following the issuance of a Settlement
Credit Facility, DTC would apply the Pursuant to the proposed rule change, Charge Notice (‘‘Settlement Charge
proceeds of such loan to the obligation current Section 4 would be replaced in Termination Notification Period’’) to
the Participant had failed to satisfy, its entirety by proposed Section 4, and notify DTC of its election to terminate
which is not expressly stated in current titled ‘‘Application of Participants Fund its business with DTC pursuant to
Section 3 of Rule 4. Deposits of Non-Defaulting proposed Section 8(a), and thereby
In addition, DTC is proposing to make Participants.’’ First, for clarity, proposed benefit from its Settlement Charge Cap,
three ministerial changes to enhance Section 4 would expressly state that as set forth in proposed Section 8(a).49
readability by: (i) Removing the ‘‘[t]he Participants Fund shall constitute Proposed Section 4 would also require
duplicative ‘‘in,’’ in the phrase ‘‘in such a liquidity resource which may be that any Participant that gives DTC
order and in such amounts,’’ (ii) applied by the Corporation in such notice of its election to terminate its
replacing the word ‘‘eliminate’’ with amounts as the Corporation shall business with DTC must comply with
‘‘satisfy,’’ and (iii) to conform to determine, in its sole discretion, to fund proposed Section 6(b) of Rule 4,50 and
proposed changes, renumbering the list settlement if there is a Defaulting if it does not, its election to terminate
of actions that DTC may take when there Participant and the amount charged to would be deemed void.
is a Participant Default. the Actual Participants Fund Deposit of Proposed Section 4 would further
DTC is also proposing to add the the Defaulting Participant pursuant to provide that DTC may retain the entire
heading ‘‘Application of Participants Section 3 of this Rule is not sufficient amount of the Actual Participants Fund
to complete settlement. In that case, the
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Fund Deposits and Preferred Stock Deposit of a Participant subject to a pro
Investments to Participant Default’’ to Corporation may apply the Actual rata settlement charge, up to the amount
Section 3. Participants Fund Deposits of of the Participant’s Settlement Charge
Participants other than the Defaulting
Section 4 and Section 5 Participant (each, a ‘‘non-defaulting 47 See supra note 20.
As noted above, current Section 4 of Participant’’) as provided in this Section 48 See supra note 21.
Rule 4 provides that if DTC incurs a loss and/or apply such other liquidity 49 See supra note 22.
or liability which is not satisfied by resources as may be available to the 50 Proposed Section 6(b) is discussed below.
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Cap in accordance with proposed Non-Default Loss Events could occur If DTC applies the Corporate
Section 8(a) of Rule 4. within the same Event Period. Contribution to a loss or liability arising
Current Section 5 of Rule 4 provides The Event Period with respect to a out of or relating to one or more Default
that ‘‘[e]xcept as provided in Section 8 Default Loss Event would begin on the Loss Events or Declared Non-Default
of this Rule, if a pro rata charge is made day on which DTC notifies Participants Loss Events relating to an Event Period,
pursuant to Section 4 of the current that it has ceased to act for the then for any subsequent Event Periods
Rule against the Required Participants Participant (or the next Business Day, if that occur during the next two hundred
Fund Deposit of a Participant, and, as a such day is not a Business Day). In the fifty (250) Business Days, the Corporate
consequence, the Actual Participants case of a Declared Non-Default Loss Contribution would be reduced to the
Fund Deposit of such Participant is less Event, the Event Period would begin on remaining unused portion of the
than its Required Participants Fund the day that DTC notifies Participants of Corporate Contribution amount that was
Deposit, the Participant shall, upon the the Declared Non-Default Loss Event (or applied for the first Event Period.54
demand of the Corporation, within such the next Business Day, if such day is not Proposed Section 5 would require DTC
time as the Corporation shall require, a Business Day). Proposed Section 5 to notify Participants of any such
Deposit to the Participants Fund the would provide that if a subsequent reduction to the Corporate Contribution.
amount in cash needed to eliminate any Default Loss Event or Declared Non- Proposed Section 5 of Rule 4 would
resulting deficiency in its Required Default Loss Event occurs during an provide that nothing in the Rules would
Participants Fund Deposit. If the Event Period, any losses or liabilities prevent DTC from voluntarily applying
Participant shall fail to make such arising out of or relating to any such amounts greater than the Corporate
deposit to the Participants Fund, the subsequent event would be resolved as Contribution against any DTC loss or
Corporation may take disciplinary losses or liabilities that are part of the liability, if the Board of Directors, in its
action against the Participant pursuant same Event Period, without extending sole discretion, believes such to be
to these Rules. Any disciplinary action the duration of such Event Period. appropriate under the factual situation
As proposed, each CTA Participant existing at the time.
which the Corporation takes pursuant to
would be obligated to DTC for the entire Proposed Section 5 of Rule 4 would
these Rules, or the voluntary or
amount of any loss or liability incurred provide that DTC shall apply the
involuntary cessation of participation by
by DTC arising out of or relating to any Corporate Contribution to losses and
the Participant, shall not affect the
Default Loss Event with respect to such liabilities that arise out of or relate to
obligations of the Participant to the
CTA Participant. Under the proposal, to one or more Default Loss Events and/or
Corporation or any remedy to which the
the extent that such loss or liability is Declared Non-Default Loss Events that
Corporation may be entitled under
not satisfied pursuant to proposed occur within an Event Period. The
applicable law.’’
Section 3 of Rule 4, DTC would apply proposed rule change also provides that
Proposed Section 4 would incorporate a Corporate Contribution thereto and if losses and liabilities with respect to
current Section 5 of Rule 4, modified as charge the remaining amount of such such Event Period remain unsatisfied
follows: (i) Conformed to reflect the loss or liability as provided in proposed following application of the Corporate
consolidation of Section 5 into proposed Section 5. Contribution, DTC would allocate such
Section 4, (ii) replacement of ‘‘Except as Under proposed Section 5, the loss losses and liabilities to Participants, as
provided in’’ with ‘‘Subject to,’’ to allocation waterfall would begin with a described below.
harmonize with language used new mandatory Corporate Contribution Proposed Section 5 of Rule 4 would
elsewhere in proposed Rule 4, and (iii) from DTC. Rule 4 currently provides state that each Participant that is a
corrections of two typographical errors, that the use of any retained earnings and Participant on the first day of an Event
in order to accurately reflect that the undivided profits by DTC is a voluntary Period would be obligated to pay its pro
Actual Participants Fund Deposit of a contribution of a discretionary amount rata share of losses and liabilities arising
Participant would be applied, and not of its retained earnings. Proposed out of or relating to each Default Loss
the Required Participants Fund Deposit, Section 5 of Rule 4 would, instead, Event (other than a Default Loss Event
and to capitalize the word ‘‘deposit’’ require a defined corporate contribution with respect to which it is the CTA
because it is a defined term. to losses and liabilities that are incurred Participant) and each Declared Non-
Proposed Section 5 by DTC with respect to an Event Period. Default Loss Event occurring during the
As proposed, the Corporate Event Period. In addition, proposed
Proposed Section 5 of Rule 4 would Contribution to losses or liabilities that Section 5 of Rule 4 would make it clear
address the substantially new and are incurred by DTC with respect to an that any CTA Participant for which DTC
revised proposed loss allocation, which Event Period would be defined as an ceases to act on a non-Business Day,
would apply to losses and liabilities amount that is equal to fifty percent triggering an Event Period that
relating to or arising out of a Default (50%) of the amount calculated by DTC commences on the next Business Day,
Loss Event or a Declared Non-Default in respect of its General Business Risk would be deemed to be a Participant on
Loss Event. Pursuant to the proposed Capital Requirement as of the end of the the first day of that Event Period. In
rule change, DTC would restructure and calendar quarter immediately preceding addition, DTC is proposing to clarify
modify its existing loss allocation the Event Period.51 DTC’s General that after a first round of loss allocations
waterfall as described below. The Business Risk Capital Requirement, as with respect to an Event Period, only
heading ‘‘Loss Allocation Waterfall’’ defined in DTC’s Clearing Agency Participants that have not submitted a
would be added to proposed Section 5. Policy on Capital Requirements,52 is, at Termination Notice in accordance with
Proposed Section 5 would establish
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a minimum, equal to the regulatory proposed Section 6(b) of Rule 4 would
the concept of an ‘‘Event Period’’ to capital that DTC is required to maintain be subject to loss allocations with
provide for a clear and transparent way in compliance with Rule 17Ad– respect to subsequent rounds relating to
of handling multiple loss events 22(e)(15) under the Act.53 that Event Period. The proposed change
occurring in a period of ten (10) would also provide that DTC may retain
Business Days, which would be grouped 51 See supra note 26. the entire Actual Participants Fund
into an Event Period. As stated above, 52 See supra note 27.
both Default Loss Events and Declared 53 17 CFR 240.17Ad–22(e)(15). 54 See supra note 30.
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(i) crediting the appropriate amounts to add a defined term for such additional proposed Section 5. Section 1(f) would
the Actual Participants Fund Deposits of amount, as ‘‘Additional Participants also be amended to make the definition
Persons which are still Participants and Fund Deposit,’’ for drafting convenience of ‘‘business’’ applicable to the entirety
(ii) paying the appropriate amounts in and transparency throughout proposed of Rule 4, instead of just Section 1(f), as
cash to Persons which are not still Rule 4. Further, DTC proposes to add the term would appear elsewhere in the
Participants. In addition, proposed the headings ‘‘Required Participants rule pursuant to the proposed rule
Section 9 would clarify that no loss Fund Deposits’’ and ‘‘Additional change. In addition, DTC proposes to
allocation under proposed Rule 4 would Participants Fund Deposits’’ to Section add the heading ‘‘Maintenance,
constitute a waiver of any claim DTC 1(a) and proposed Section 1(b), Permitted Use and Investment of
may have against a Participant for any respectively. Participants Fund’’ to Section 1(f) of
losses or liabilities to which the Section 1(c). For enhanced Rule 4.
Participant is subject under DTC Rules readability, DTC is proposing to add the Section 1(g) (consolidated into
and Procedures, including, without heading ‘‘Voluntary Participants Fund proposed Section 1(f)). Pursuant to the
limitation, any loss or liability to which Deposits’’ to Section 1(c) of Rule 4, and proposed rule change, DTC would
it may be subject under proposed Rule to replace the word ‘‘as’’ with ‘‘in the consolidate current Section 1(g) into
4. manner.’’ proposed Section 1(f), and modify
DTC further proposes to add the Section 1(d). For enhanced clarity, language to make it clear that DTC may
heading ‘‘No Waiver; Recovery and DTC is proposing to modify Section 1(d) invest cash in the Participants Fund in
Repayment’’ to proposed Section 9. to make it clear that any Additional accordance with the Clearing Agency
Participants Fund Deposit is required to Investment Policy adopted by DTC.66
B. Other Proposed Clarifying, be in cash. DTC is also proposing to Further, language would be streamlined
Conforming and Technical Changes to delete the extraneous phrase ‘‘pursuant by replacing ‘‘securities, repurchase
Rule 4 to this Section’’ and to replace language agreements or deposits’’ with ‘‘financial
Section 1 regarding Section 2 of Rule 9(A) with assets,’’ and ‘‘securities and repurchase
Section 1(a) and Section 1(b). Section the proposed defined term ‘‘Additional agreements in which such cash is
1(a) addresses, among other things, the Participants Fund Deposit.’’ Further, invested’’ with ‘‘its investment of such
DTC proposes to add the heading ‘‘Cash cash.’’
formula for determining the Required
Participants Fund’’ to Section 1(d) of Section 1(h) (proposed Section 1(g)).
Participants Fund Deposits of
Rule 4. As discussed above, DTC is proposing
Participants. DTC is proposing to insert Section 1(e). For enhanced clarity, to replace ‘‘four’’ years with ‘‘two’’
the words ‘‘or wind-down’’ to make it DTC is proposing to add the language years, in order to reduce the time within
clear that the formulas for determining ‘‘among Account Families’’ to clarify the which DTC would be required to return
the Required Participants Fund Deposits scope of the allocation described in the Actual Participants Fund Deposit of
of Participants and the amount of the Section 1(e). In addition, DTC proposes a former Participant. In addition, DTC is
minimum Required Participants Fund to add the heading ‘‘Allocation of proposing to (i) add the heading ‘‘Return
Deposit would be fixed by DTC so as to Participants Fund Deposits Among of Participants Fund Deposits to
assure that the aggregate amount of Account Families’’ to Section 1(e) of Participants’’ to proposed Section 1(g),
Required Participants Fund Deposits of Rule 4. (ii) update a cross reference, and (iii)
Participants will be increased to provide Section 1(f). Section 1(f) addresses, correct two typographical errors.
for the costs and expenses incurred by among other things, the permitted use of
it incidental to the wind-down of DTC, the Participants Fund. For consistency Section 2
in addition to the voluntary liquidation with the balance of Section 1(f), the first Pursuant to the proposed rule change,
of DTC.65 Further, DTC proposes to paragraph would be amended to state Section 2 of Rule 4 would be titled
delete the extraneous phrase ‘‘if any.’’ that the Actual Participants Fund ‘‘Participants Investment.’’
For increased clarity and readability, Deposits of Participants ‘‘may be used or Section 2(a)–2(d) (Proposed Section
DTC is proposing to consolidate Section invested’’ instead of stating ‘‘shall be 2(a)). For clarity, DTC is proposing to
1(b) into Section 1(a), and to relocate the applied.’’ Section 1(f) provides, in part, consolidate Sections 2(b)–2(d) into
sentences ‘‘The Corporation may require that the Participants Fund is limited to proposed Section 2(a) and would add
a Participant to Deposit an additional the satisfaction of losses or liabilities of
amount to the Participants Fund DTC incident to the business of DTC. 66 See Securities Exchange Act Release No. 79528
pursuant to Section 2 of Rule 9(A). Any (December 12, 2016), 81 FR 91232 (December 16,
Section 1(f) currently defines 2016) (SR–DTC–2016–007). The Clearing Agency
such additional amount shall be part of ‘‘business’’ with respect to DTC as ‘‘the Investment Policy (the ‘‘Policy’’) governs the
the Required Participants Fund Deposit doing of all things in connection with or management, custody, and investment of cash
of such Participant.’’ from Section 1(a) relating to [DTC’s] performance of the deposited to the Participants Fund, the proprietary
to a new proposed Section 1(b). In liquid net assets (cash and cash equivalents) of DTC
services specified in the first and second and other funds held by DTC. The Policy sets forth
addition to the relocation, DTC would paragraphs of Rule 6 or the cessation of guiding principles for the investment of those
such services.’’ For enhanced funds, which include adherence to a conservative
65 On December 18, 2017, DTC submitted a investment philosophy that places the highest
transparency of the permitted uses of
proposed rule change and advance notice to adopt priority on maximizing liquidity and avoiding risk,
the Recovery & Wind-down Plan of DTC, and
the Participants Fund, proposed Section as well as mandating the segregation and separation
amend the Rules in order to adopt Rule 32(A) 1(f) would be amended to explicitly of funds. The Policy also addresses the process for
(Wind-down of the Corporation) and Rule 38 state that the Actual Participants Fund evaluating credit ratings of counterparties and
(Market Disruption and Force Majeure). See Deposits of Participants may be used (i) identifies permitted investments within specified
sradovich on DSK3GMQ082PROD with NOTICES
Securities Exchange Act Release Nos. 82432 parameters. In general, assets are required to be
(January 2, 2018), 83 FR 884 (January 8, 2018) (SR–
to satisfy the obligations of Participants held by regulated and creditworthy financial
DTC–2017–021) and 82579 (January 24, 2018), 83 to DTC, as provided in proposed Section institution counterparties and invested in financial
FR 4310 (January 30, 2018) (SR–DTC–2017–803). 3, (ii) to fund settlement among non- instruments that, with respect to the Participants
On June 28, 2018, DTC filed amendments to the defaulting Participants, as provided in Fund, may include deposits with banks, including
proposed rule change and advance notice with the the Federal Reserve Bank of New York,
Commission and the Board of Governors of the
proposed Section 4 and (iii) to satisfy collateralized reverse-repurchase agreements, direct
Federal Reserve System, respectively, available at losses and liabilities of DTC incident to obligations of the U.S. government and money-
http://www.dtcc.com/legal/sec-rule-filings.aspx. the business of DTC, as provided in market mutual funds.
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![Federal Register / Vol. 83, No. 139 / Thursday, July 19, 2018 / Notices 34263
clarity of the Rules regarding the loss Reference Room, 100 F Street NE, Proposed Rule Change was published
allocation process. Clarifying DTC’s Washington, DC 20549 on official for comment in the Federal Register on
Voluntary Retirement provisions would business days between the hours of January 8, 2018.2 On February 8, 2018,
improve the clarity of the Rules and 10:00 a.m. and 3:00 p.m. Copies of the the Commission designated a longer
help ensure that DTC’s Voluntary filing also will be available for period within which to approve,
Retirement process is transparent and inspection and copying at the principal disapprove, or institute proceedings to
clear to all Participants. Making office of DTC and on DTCC’s website determine whether to approve or
technical and conforming changes to (http://dtcc.com/legal/sec-rule- disapprove the Proposed Rule Change.3
ensure the Rules remain clear and filings.aspx). All comments received On March 20, 2018, the Commission
accurate would facilitate Participants’ will be posted without change. Persons instituted proceedings to determine
understanding of the Rules and their submitting comments are cautioned that whether to approve or disapprove the
obligations thereunder. As such, DTC we do not redact or edit personal Proposed Rule Change.4 On June 25,
believes that these proposed rule identifying information from comment 2018, the Commission designated a
changes would not have any impact on submissions. You should submit only longer period for Commission action on
competition. information that you wish to make the proceedings to determine whether to
available publicly. All submissions approve or disapprove the Proposed
(C) Clearing Agency’s Statement on Rule Change.5 On June 28, 2018, DTC
should refer to File Number SR–DTC–
Comments on the Proposed Rule filed Amendment No. 1 to the Proposed
2017–022 and should be submitted on
Change Received From Members, Rule Change to amend and replace in its
or before August 3, 2018.
Participants, or Others entirety the Proposed Rule Change as
For the Commission, by the Division of
Written comments relating to this Trading and Markets, pursuant to delegated originally submitted on December 18,
proposed rule change have not been authority.79 2017.6 As of the date of this release, the
solicited or received. DTC will notify Eduardo A. Aleman,
the Commission of any written Assistant Secretary. Commission required additional information for
comments received by DTC. consideration of the Advance Notice, pursuant to
[FR Doc. 2018–15364 Filed 7–18–18; 8:45 am] Section 806(e)(1)(D) of the Clearing Supervision
III. Solicitation of Comments BILLING CODE 8011–01–P Act, which provided the Commission with an
additional 60-days in the review period beginning
Interested persons are invited to on the date that the information requested is
submit written data, views and received by the Commission. (12 U.S.C.
SECURITIES AND EXCHANGE 5465(e)(1)(D).) See Memorandum from the Office of
arguments concerning the foregoing.
COMMISSION Clearance and Settlement Supervision, Division of
Comments may be submitted by any of Trading and Markets, titled ‘‘Commission’s Request
the following methods: [Release No. 34–83628; File No. SR–DTC– for Additional Information,’’ available at http://
2017–021] www.sec.gov/rules/sro/dtc-an.shtml. On June 28,
Electronic Comments 2018, DTC filed Amendment No. 1 to the Advance
• Use the Commission’s internet Self-Regulatory Organizations; The Notice. To promote the public availability and
Depository Trust Company; Notice of transparency of its post-notice amendment, DTC
comment form (http://www.sec.gov/ submitted a copy of Amendment No. 1 through the
rules/sro.shtml); or Filing of Amendment No. 1 to a Commission’s electronic public comment letter
• Send an email to rule-comments@ Proposed Rule Change To Adopt a mechanism. Accordingly, Amendment No. 1 to the
sec.gov. Please include File Number SR– Recovery & Wind-Down Plan and Advance Notice has been posted on the
Related Rules Commission’s website at https://www.sec.gov/rules/
DTC–2017–022 on the subject line. sro/dtc-an.htm and thus been publicly available
Paper Comments July 13, 2018. since June 29, 2018. On July 6, 2018, the
Commission received the information requested,
• Send paper comments in triplicate On December 18, 2017, The which added an additional 60-days to the review
to Secretary, Securities and Exchange Depository Trust Company (‘‘DTC’’) period pursuant to Sections 806(e)(1)(E) and (G) of
filed with the Securities and Exchange the Clearing Supervision Act. (12 U.S.C.
Commission, 100 F Street NE, 5465(e)(1)(E) and (G).) See Memorandum from the
Washington, DC 20549–1090. Commission (‘‘Commission’’), pursuant Office of Clearance and Settlement Supervision,
All submissions should refer to File to Section 19(b)(1) of the Securities Division of Trading and Markets, titled ‘‘Response
Number SR–DTC–2017–022. This file Exchange Act of 1934 (‘‘Act’’) and Rule to the Commission’s Request for Additional
19b–4 thereunder, proposed rule change Information,’’ available at http://www.sec.gov/
number should be included on the rules/sro/dtc-an.shtml. The proposal, as set forth in
subject line if email is used. To help the SR–DTC–2017–021 (‘‘Proposed Rule both the Advance Notice and the Proposed Rule
Commission process and review your Change’’) to adopt a recovery and wind- Change, shall not take effect until all required
comments more efficiently, please use down plan and related rules.1 The regulatory actions are completed.
2 Securities Exchange Act Release No. 82432
only one method. The Commission will (January 2, 2018), 83 FR 884 (January 8, 2018) (SR–
79 17
CFR 200.30–3(a)(12).
post all comments on the Commission’s 1 15 DTC–2017–021).
U.S.C. 78s(b)(1) and 17 CFR 240.19b–4,
internet website (http://www.sec.gov/ respectively. On December 18, 2017, DTC filed the
3 Securities Exchange Act Release No. 82669
rules/sro.shtml). Copies of the Proposed Rule Change as advance notice SR–DTC– (February 8, 2018), 83 FR 6653 (February 14, 2018)
submission, all subsequent 2017–803 (‘‘Advance Notice’’) with the Commission (SR–DTC–2017–021; SR–FICC–2017–021; SR–
pursuant to Section 806(e)(1) of Title VIII of the NSCC–2017–017).
amendments, all written statements 4 Securities Exchange Act Release No. 82912
Dodd-Frank Wall Street Reform and Consumer
with respect to the Proposed Rule Protection Act entitled the Payment, Clearing, and (March 20, 2018), 83 FR 12999 (March 26, 2018)
Change that are filed with the Settlement Supervision Act of 2010 (‘‘Clearing (SR–DTC–2017–021).
Commission, and all written Supervision Act’’) and Rule 19b–4(n)(1)(i) of the 5 Securities Exchange Act Release No. 83509
communications relating to the Act. (12 U.S.C. 5465(e)(1) and 17 CFR 240.19b– (June 25, 2018), 83 FR 30785 (June 29, 2018) (SR–
sradovich on DSK3GMQ082PROD with NOTICES
4(n)(1)(i), respectively.) On January 30, 2018, the DTC–2017–021; SR–FICC–2017–021; SR–NSCC–
Proposed Rule Change between the Commission published in the Federal Register 2017–017).
Commission and any person, other than notice of filing of the Advance Notice. The notice 6 To promote the public availability and
those that may be withheld from the also extended the review period for the Advance transparency of its post-notice amendment, DTC
public in accordance with the Notice pursuant to Section 806(e)(1)(H) of the submitted a copy of Amendment No. 1 through the
Clearing Supervision Act. (12 U.S.C. 5465(e)(1)(H).) Commission’s electronic public comment letter
provisions of 5 U.S.C. 552, will be See Securities Exchange Act Release No. 82579 mechanism. Accordingly, Amendment No. 1 to the
available for website viewing and (January 24, 2018), 83 FR 4310 (January 30, 2018) Proposed Rule Change has been posted on the
printing in the Commission’s Public (SR–DTC–2017–803). On April 10, 2018, the Continued
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Document Created: 2018-07-19 01:35:16
Document Modified: 2018-07-19 01:35:16
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| Collection | Federal Register | |
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