83 FR 44377 - Self-Regulatory Organizations; The Depository Trust Company; Order Granting Approval of Proposed Rule Change To Amend Rule 35 To Provide for Designated Accounts for Use With Designated Collateral Management Service Providers
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 83, Issue 169 (August 30, 2018)
Federal Register Volume 83, Issue 169 (August 30, 2018)
| Page Range | 44377-44381 | |
| FR Document | 2018-18784 |
[Federal Register Volume 83, Number 169 (Thursday, August 30, 2018)] [Notices] [Pages 44377-44381] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2018-18784] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-83940; File No. SR-DTC-2018-006] Self-Regulatory Organizations; The Depository Trust Company; Order Granting Approval of Proposed Rule Change To Amend Rule 35 To Provide for Designated Accounts for Use With Designated Collateral Management Service Providers August 24, 2018. On July 9, 2018, The Depository Trust Company (``DTC'') filed with the Securities and Exchange Commission (``Commission'') proposed rule change SR-DTC-2018-006 pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder.\2\ The proposed rule change was published for comment in the Federal Register on July 24, 2018.\3\ The Commission did not receive any comment letters on the proposed rule change. For the reasons discussed below, the Commission approves the proposed rule change. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. \3\ See Securities Exchange Act Release No.83667 (July 18, 2018), 83 FR 35044 (July 24, 2018) (SR-DTC-2018-006) (``Notice''). --------------------------------------------------------------------------- I. Description of the Proposed Rule Change The proposed rule change would amend the Rules, By-Laws and Organization Certificate of The Depository Trust Company (``DTC Rules'') \4\ to revise DTC's current Rule 35--CMS Reporting (``Rule 35''). --------------------------------------------------------------------------- \4\ Available at http://www.dtcc.com/legal/rules-and-procedures.aspx. Each capitalized term not otherwise defined herein has its respective meaning as set forth in the DTC Rules. --------------------------------------------------------------------------- A. Background Currently, Rule 35 provides that a Participant of DTC (``Participant'') may establish a collateral management service (``CMS'') \5\ sub-account (``CMS Sub-Account''), which authorizes DTCC Euroclear Global Collateral Ltd. (``DEGCL'') \6\ to receive from DTC (i) a CMS report that provides information regarding securities credited to the CMS Sub-Account of such Participant at the time of the report (``CMS Report''), and (ii) CMS delivery information that provides real-time information regarding any delivery or pledge from, or delivery or release to, the CMS Sub-Account (``CMS Delivery Information'').\7\ --------------------------------------------------------------------------- \5\ Collateral management generally involves calculating collateral requirements and facilitating the transfer of collateral between counterparties. See Securities Exchange Act Release No. 64796 (July 1, 2011), 76 FR 39963, 39964 (July 7, 2011) (S7-28-11). \6\ DEGCL is a joint venture of The Depository Trust & Clearing Corporation, the corporate parent of DTC, and Euroclear S.A./N.V. and was formed for the purpose of offering global information, record keeping, and processing services for derivatives collateral transactions and other types of financing transactions. DEGCL offers service options for the selection of collateral to satisfy the collateral obligations of its users (``DEGCL CMS''). See Securities Exchange Act Release No. 80280 (March 20, 2017), 82 FR 15081 (March 24, 2017) (SR-DTC-2017-001) (``CMS Order'') (providing additional information on DEGCL and DEGCL CMS). One option relates exclusively to Securities held at DTC, and is dependent on Rule 35. Id. \7\ CMS Order, 82 FR at 21838. --------------------------------------------------------------------------- B. The Proposed Rule Change DTC proposes five changes to Rule 35: (1) Adding the term ``CMSP'' (i.e., a CMS provider) and its associated function; (2) adding the term ``CMSP Accounts'' and its associated function; (3) adding the term ``CMSP Reports'' and its associated function; (4) authorizing a CMSP to submit CMSP instructions (``CMSP Instructions'') on behalf of a Participant or a Pledgee of DTC (``Pledgee''); and (5) making ministerial changes to conform with the proposed changes, as well as making stylistic edits.\8\ Each of these proposed changes is described below. --------------------------------------------------------------------------- \8\ Notice, 83 FR at 35044-45. --------------------------------------------------------------------------- 1. CMSP The proposal would add to Rule 35 the term and function of a CMSP, which a Participant or Pledgee could then designate to act on its behalf under the rule, pursuant to the proposed changes.\9\ The term CMSP would replace the existing, singular designation of DEGCL to act under Rule 35 as a collateral management provider.\10\ A partnership, corporation, or other organization or entity could become a CMSP, under the proposed changes to Rule 35, if it satisfies three proposed criteria: (1) One or more Participants or Pledgees designate the entity as a CMSP for purposes of Rule 35; (2) the entity (i) satisfies at least one of the qualifications set forth in Section 1(a)-(h) of Rule 3 \11\ or (ii) is organized in a country other than the United States, is regulated by a financial regulatory authority in the country in which it is organized, and demonstrates that it has notified the Commission in writing of its intention to operate under Rule 35; \12\ and (3) the entity establishes a connection to DTC, in accordance with the reasonable requirements of DTC, in order to be able to receive position and transaction information and to submit instructions to DTC in accordance with the DTC Rules and Procedures.\13\ --------------------------------------------------------------------------- \9\ Notice, 83 FR at 35045. \10\ Id. \11\ Sections 1(a)-(h) of Rule 3 provide the qualifications for a partnership, corporation or other organization or entity to be eligible to become a Participant. See DTC Rules, Rule 3, Sections 1(a)-(h), supra note 4. \12\ DTC states that in order to protect DTC, its Participants and Pledgees, a CMSP that wishes to act under the proposed changes to Rule 35 would need to be subject to regulatory oversight comparable to a Participant, as provided in proposed Section 2(b)(i) of Rule 35, or, if the entity is organized in a country other than the United States (a ``non-U.S. entity''), it would need to be regulated by a financial regulatory authority in the country in which it is organized, as provided in proposed Section 2(b)(ii) of Rule 35. Notice, 83 FR at 35045. Further, the proposed rule change would require that, in order to be eligible to become a CMSP, the non-U.S. entity must notify the Commission in writing of its intention to operate under Rule 35, as modified by the proposed changes. Id. While DTC reserves the right to request documentation and/or information relating to a CMSP's compliance with the requirements of proposed Section 2 of Rule 35, it would be the sole responsibility of the Participant or Pledgee to evaluate and choose an appropriate CMSP that, at a minimum, satisfies the requirements. Id. Under proposed Section 2 of Rule 35, the designating Participant or Pledgee would remain liable as principal for the actions of its designated CMSP(s) on its behalf, and would indemnify DTC for any loss, liability, or expense as a result of any claim arising from (i) any act or omission of the CMSP, (ii) the provision of CMSP Reports to the CMSP by DTC, or (iii) DTC's compliance with instructions of the CMSP. Id. \13\ Id. --------------------------------------------------------------------------- As proposed, DTC may decline to accept an entity as a CMSP if it would present material risk to DTC, its Participants and Pledgees, or impose material costs to DTC.\14\ DTC states that some examples of circumstances in which DTC might reject an applicant as a CMSP include when DTC reasonably believes that acceptance of the applicant as a CMSP would (i) subject DTC to additional legal or regulatory regimes, to which it is not otherwise subject; (ii) expose DTC to additional technology risk; or (iii) cause DTC to be in violation of applicable law or regulation.\15\ --------------------------------------------------------------------------- \14\ Id. \15\ Id. --------------------------------------------------------------------------- 2. CMSP Account The proposed rule change would add the term and function of a ``CMSP Account'' to Rule 35.\16\ Currently, Rule 35 requires a Participant looking to utilize the services offered through Rule 35 to designate an account for such [[Page 44378]] purposes (i.e., a CMS Sub-Account).\17\ A Pledgee, however, is not permitted to designate a CMS Sub-Account under the existing Rule 35. --------------------------------------------------------------------------- \16\ Id. \17\ Id. --------------------------------------------------------------------------- The proposed CMSP Account would replace the concept of the existing CMS Sub-Account and would allow either a Participant or a Pledgee to designate any account as a CMSP Account.\18\ Once established, a CMSP Account would allow the designated CMSP access and authority to provide instruction to DTC (as further described below) for the Delivery, Pledge, or Release of securities on behalf of a Participant or Pledgee, as applicable.\19\ As proposed, a Participant or Pledgee could designate one or more CMSP Accounts and, concurrently, designate one or more CMSPs with respect to each CMSP Account.\20\ --------------------------------------------------------------------------- \18\ Id. \19\ Id. The proposed rule change would specify that, with respect to a CMSP Account, a Participant or Pledgee would retain the right to instruct DTC as otherwise provided in the DTC Rules and Procedures. Id. \20\ Id. --------------------------------------------------------------------------- A Participant's or Pledgee's designation of a CMSP for a CMSP Account would serve four functions: (1) The appointment of the CMSP to act on its Participant's or Pledgee's behalf for the purposes of Rule 35; (2) the authorization of the CMSP to receive CMSP Reports and to provide CMSP Instructions on behalf of its Participant or Pledgee; (3) the authorization of DTC to act in accordance with any CMSP Instruction of a Participant's or Pledgee's designated CMSP; and (4) the representation and warranty of the Participant or Pledgee that it is duly authorized to instruct DTC to provide CMSP Reports to the CMSP and to act in accordance with any CMSP Instruction.\21\ --------------------------------------------------------------------------- \21\ Id. --------------------------------------------------------------------------- The proposed rule change would not substantially alter the current liability and indemnification provisions provided for in Rule 35.\22\ Specifically, the proposed rule change would provide that each Participant and Pledgee that designates a CMSP would indemnify DTC, and any nominee of DTC, against any loss, liability or expense as a result of any claim arising from the compliance of DTC with CMSP Instructions, except to the extent such loss, liability, or expense is caused directly by the DTC's gross negligence or willful misconduct.\23\ --------------------------------------------------------------------------- \22\ Id. \23\ Id. --------------------------------------------------------------------------- 3. CMSP Reports Rule 35 currently authorizes DEGCL, and only DEGCL, to receive position and transaction information from DTC on behalf of a Participant in the form of CMS Delivery Information and CMS Reports.\24\ The proposed rule change would permit a Participant or Pledgee to authorize a CMSP, which may or may not be DEGCL, to receive CMSP Reports (with respect to CMSP Accounts for which the CMSP is designated).\25\ The CMSP Information and CMSP Position Report are analogous to the reports currently provided to DEGCL under Rule 35 (i.e., CMS Report and CMS Delivery Information, respectively).\26\ --------------------------------------------------------------------------- \24\ Id. \25\ Id. \26\ Id. --------------------------------------------------------------------------- Currently, Rule 35 defines ``CMS Delivery Information'' to mean, ``with respect to CMS Securities and any Delivery or Pledge thereof from, or Delivery or Release thereof to, a CMS Sub-Account, a copy of any Delivery, Pledge, or Release message sent to the CMS Participant by DTC, including the following information: (x) The CUSIP, ISIN, or other identification number of such CMS Securities, and (y) the number of shares or other units or principal amount of such CMS Securities.'' \27\ DTC states that this definition was drafted to align with DEGCL specifications.\28\ --------------------------------------------------------------------------- \27\ Notice, 83 FR at 35046. \28\ Id. --------------------------------------------------------------------------- Pursuant to the proposed rule change, the definition of ``CMSP Information'' would be drafted in more general terms to provide flexibility for the different collateral management service offerings of CMSPs (in addition to DEGCL).\29\ Pursuant to the proposed rule change, ``CMSP Information'' would mean, ``with respect to a CMSP Account of a Participant or Pledgee, a copy of any message sent to the Participant or Pledgee by the Corporation.'' \30\ These messages would include, but would not be limited to, the Delivery, Pledge, and Release messages referenced in the definition of CMS Delivery Information in existing Rule 35.\31\ --------------------------------------------------------------------------- \29\ Id. \30\ Id. \31\ Id. --------------------------------------------------------------------------- Similarly, Rule 35 currently defines ``CMS Report'' to mean, ``with respect to a CMS Participant and its CMS Sub-Account, the following information identifying the CMS Securities that are, at the time of such report, credited to such CMS Sub-Account: (i) The CUSIP, ISIN, or other identification number of the CMS Securities, and (ii) the number of shares or other units or principal amount of the CMS Securities.'' \32\ DTC states that this definition was drafted to align with DEGCL specifications.\33\ Pursuant to the proposed rule change, the specific language ``(i) the CUSIP, ISIN, or other identification number of the CMS Securities, and (ii) the number of shares or other units or principal amount of the CMS Securities'' would be deleted from the definition of ``CMSP Position Reports.'' \34\ --------------------------------------------------------------------------- \32\ Id. \33\ Id. \34\ Id. --------------------------------------------------------------------------- Finally, similar to what is provided for in Rule 35 today, the proposed changes would provide that DTC would have no liability to any Participant or Pledgee as a result of providing one or more CMSP Reports to any CMSP pursuant to proposed Section 5 of Rule 35.\35\ --------------------------------------------------------------------------- \35\ Id. --------------------------------------------------------------------------- 4. CMSP Instructions The proposed rule change would provide that a CMSP would be authorized to instruct DTC, on behalf of the Participant or Pledgee, for the Delivery, Pledge, or Release of securities credited to such Participant or Pledgee's CMSP Account, as applicable.\36\ CMSP Instructions would be subject to the terms and conditions of the DTC Rules and Procedures applicable to Deliveries, Pledges, and Releases of securities generally, including risk management controls.\37\ DTC states that the purpose of this proposed change is to streamline collateral processing by CMSPs by allowing them to receive information directly from DTC and to take direct action on that information through CMSP Instructions, on behalf of Participants and Pledgees.\38\ --------------------------------------------------------------------------- \36\ For a CMSP Account of a Participant, that would include Delivery or Pledge. Id. For a CMSP Account of a Pledgee, that would include Delivery or Release. Id. \37\ DTC states that its risk management controls, including Collateral Monitor and Net Debit Cap (as defined in Rule 1, Section 1 of the Rules), are designed so that DTC may complete system-wide settlement notwithstanding the failure to settle of its largest Participant or Affiliated Family of Participants. Id. 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. Id. Pursuant to these controls under applicable DTC Rules and Procedures, DTC states that it would not process any Delivery or Pledge instruction order from a CMSP Account that would cause the Participant to exceed its Net Debit Cap or to have insufficient DTC Collateral to secure its obligations to DTC. Id. DTC states that Deliveries would be processed in the same order and with the same priority as otherwise provided in the DTC Rules and Procedures (i.e., such Deliveries and Pledges would not take precedence over any other type of Delivery or Pledge in the DTC system). Id. \38\ Id. --------------------------------------------------------------------------- The proposal would not preclude instructions by the Participant or Pledgee itself, or CMSP Instructions by another CMSP, with respect to the same [[Page 44379]] CMSP Account.\39\ Furthermore, the proposed changes to Rule 35 would provide that DTC has no liability (i) to a Participant or Pledgee for acting in accordance with, or relying upon, CMSP Instructions, or (ii) to any CMSP as a result of DTC acting in accordance with, or relying upon, instructions of any other Person, including, but not limited to, the Participant or Pledgee or any other designated CMSP.\40\ --------------------------------------------------------------------------- \39\ Id. \40\ Id. --------------------------------------------------------------------------- 5. Ministerial Changes In connection with the foregoing, DTC proposes the following ministerial changes to Rule 35 in order to conform the existing rule text to the proposed changes, as well as to make stylistic edits: \41\ --------------------------------------------------------------------------- \41\ Id. --------------------------------------------------------------------------- Title. DTC proposes to replace the current title ``CMS Reporting'' with ``CMSP Reports and Instructions,'' to reflect the amended substance of the proposed rule.\42\ --------------------------------------------------------------------------- \42\ Id. --------------------------------------------------------------------------- Section 1. For stylistic consistency, DTC proposes to insert the title ``Certain Defined Terms'' for Section 1.\43\ DTC further proposes to (i) delete the definitions of CMS, CMS Participant, CMS Representative, CMS Securities, DEGCL, and DTCC; (ii) add definitions for CMSP, CMSP Account, CMSP Instruction, and CMSP Reports; (iii) replace the defined term ``CMS Delivery Information'' with ``CMSP Information'' and simplify the definition by referring to ``a copy of any message sent to the Participant or Pledgee'' with respect to a CMSP Account, instead of ``a copy of any Delivery, Pledge, or Release message sent to the CMS Participant by DTC, including the following information: (x) The CUSIP, ISIN, or other identification number of such CMS Securities, and (y) the number of shares or other units or principal amount of such CMS Securities''; and (iv) replace the defined term ``CMS Report'' with ``CMSP Position Report'' and simplify the definition by removing the DEGCL specifications of ``(i) the CUSIP, ISIN, or other identification number of the CMS Securities, and (ii) the number of shares or other units or principal amount of the CMS Securities.'' \44\ --------------------------------------------------------------------------- \43\ Id. \44\ Id. --------------------------------------------------------------------------- Proposed Section 2 (New). DTC proposes to insert a new proposed Section 2, titled ``Qualification as a CMSP.'' \45\ This section would identify the aforementioned requirements that an entity must satisfy to become a CMSP.\46\ --------------------------------------------------------------------------- \45\ Id. \46\ Id. --------------------------------------------------------------------------- Section 2 (Proposed Section 3). DTC proposes to renumber Section 2 to Section 3, and to change the title of proposed Section 3 to ``CMSP Accounts.'' \47\ DTC also proposes to modify subsection (a) to delete DEGCL CMS-specific terms and to reflect that (i) a Participant or Pledgee can designate one or more CMSP Accounts, as well as designate one or more CMSPs for each CMSP Account, and (ii) as noted above, describe what the designation of a CMSP entails, with respect to a CMSP Account by a Participant or Pledgee would constitute.\48\ DTC further proposes to modify subsection (b) to remove CMS-specific references, to reflect the inclusion of Pledgees, CMSPs, and CMSP Instruction in the proposed rule, and to make ministerial changes.\49\ Additionally, DTC proposes to remove subsection (c) as it would be no longer relevant because it relates exclusively to DEGCL.\50\ --------------------------------------------------------------------------- \47\ Id. \48\ Notice, 83 FR at 35046-7. \49\ Notice, 83 FR at 35047. \50\ Id. --------------------------------------------------------------------------- Section 3 (Proposed Section 4). DTC proposes to renumber Section 3 as Section 4, and to change the title of the section to ``Instructions on a CMSP Account.'' \51\ DTC further proposes to (i) modify subsection (a) to remove provisions relating to the transfer of securities to a CMS Sub-Account, and to insert a provision stating that a Participant or Pledgee retains its right to instruct DTC with respect to its CMSP Account, and (ii) modify subsection (b) to remove provisions relating to the transfer of securities to a CMS Sub-Account, and to insert a provision specifying that a CMSP may instruct the Delivery, Pledge, or Release of securities to or from a CMSP Account for which it is designated pursuant to proposed Section 3 of Rule 35.\52\ Further, DTC proposes to insert the new subsection (c) that would state that all Deliveries, Pledges, and Releases to or from a CMSP Account would be subject to the terms and conditions of the DTC Rules and Procedures applicable to Deliveries, Pledges, and Releases of securities generally.\53\ --------------------------------------------------------------------------- \51\ Id. \52\ Id. \53\ Id. --------------------------------------------------------------------------- Section 4. DTC proposes to delete this section, as it relates to DEGCL specifications for a CMS Report.\54\ --------------------------------------------------------------------------- \54\ Id. --------------------------------------------------------------------------- Section 5. DTC proposes to replace the current title of ``CMS Delivery Information'' with ``CMSP Reports.'' \55\ DTC is further proposing to insert proposed subsection (a) to provide for the provision of CMSP Position Reports and CMSP Information to each CMSP for each CMSP Account for which it is designated.\56\ DTC additionally proposes to delete language relating to DEGCL-specific requirements regarding ``CMS Delivery Information.'' \57\ Further, DTC proposes to incorporate the remaining language of Section 5, modified to conform to the defined terms of the proposed rule change, into proposed subsection (b).\58\ --------------------------------------------------------------------------- \55\ Id. \56\ Id. \57\ Id. \58\ Id. --------------------------------------------------------------------------- Section 6. DTC proposes to modify the section to (i) add references to CMSPs, Pledgees, CMSP Reports, and CMSP Instructions, (ii) remove references to CMS Participant, CMS Report, Delivery Information, and CMS Representative, and (iii) update a cross-reference relating to CMSP Reports.\59\ DTC further proposes to add disclaimers of liability to (i) a Participant or Pledgee for acting in accordance with, or relying upon, CMSP Instructions, or (ii) any CMSP as a result of DTC acting in accordance with, or relying upon, instructions of any other Person, including, but not limited to, the Participant or Pledgee or any other designated CMSP, with respect to a CMSP Account.\60\ --------------------------------------------------------------------------- \59\ Id. \60\ Id. --------------------------------------------------------------------------- For additional clarity, DTC also proposes to make ministerial changes to (i) update articles, pronouns, and determiners, and (ii) modify language for stylistic conformity within the proposed rule.\61\ --------------------------------------------------------------------------- \61\ Id. --------------------------------------------------------------------------- II. Discussion and Commission Findings Section 19(b)(2)(C) of the Act \62\ directs the Commission to approve a proposed rule change of a self-regulatory organization if it finds that such proposed rule change is consistent with the requirements of the Act and rules and regulations thereunder applicable to such organization. The Commission believes the proposal is consistent with the Act, specifically Section 17A(b)(3)(F) of the Act and Rule 17Ad-22(e)(21) under the Act.\63\ --------------------------------------------------------------------------- \62\ 15 U.S.C. 78s(b)(2)(C). \63\ 15 U.S.C. 78q-1(b)(3)(F); 17 CFR 240.17Ad-22(20). --------------------------------------------------------------------------- [[Page 44380]] A. Consistency With Section 17A Section 17A(b)(3)(F) of the Act \64\ requires, inter alia, that the rules of the clearing agency be designed to promote the prompt and accurate clearance and settlement of securities transactions. --------------------------------------------------------------------------- \64\ 15 U.S.C. 78q-1(b)(3)(F). --------------------------------------------------------------------------- As described above, DTC proposes to make five core changes to Rule 35. First, DTC proposes to no longer reference DEGCL as the sole CMS provider under Rule 35 but, instead, to reference the new term CMSP and its associated functions. Specifically, the proposed change would allow any otherwise eligible partnership, corporation, or other organization or entity that meets the proposed criteria to offer collateral management services through DTC for the purpose of Rule 35. The Commission believes that by expanding Rule 35 to include a broader concept of a CMSP, not just one specific CMSP (i.e., DEGCL), the proposed change (i) opens up the opportunity for other collateral management providers to compete in offering their services under Rule 35, and (ii) affords Participants and Pledgees the opportunity to evaluate whether another entity could better meet its collateral management requirements. By increasing the opportunity for competition and selection, the proposed change should help collateral management providers, Participants, and Pledgees be better positioned to more efficiently effect the settlement of collateral transactions under Rule 35. Therefore, the change would help promote the prompt and accurate clearance and settlement of securities transactions. Second, as described above, DTC proposes to add to Rule 35 the term CMSP Account and its associated functions. As proposed, a CMSP Account would allow Pledgees, not just Participants, to use collateral management service offerings of CMSPs for the purposes of Rule 35. By establishing the ability for Pledgees to utilize collateral management services under Rule 35, through the proposed CMSP Account, the proposal affords Pledgees the same opportunities to manage such collateral transactions through DTC as Participants. The Commission believes that expanding Rule 35 to include Pledgees should help Pledgees more efficiently effect the settlement of their collateral transactions at DTC, thus helping to promote the prompt and accurate clearance and settlement of such securities transactions. Third, as described above, DTC proposes to add to Rule 35 the term CMSP Reports and its associated functions; namely, the CMSP Position Report and the CMSP Information. The CMSP Position Report would enable the CMSP to know what securities are credited to a Participant or Pledgee's CMSP Account each day, while the CMSP Information would allow the CMSP to know the Participant's or the Pledgee's real-time correspondence with DTC. These two reports are designed to furnish the CMSP with information needed to calculate collateral requirements and facilitate the transfer of collateral between counterparties. As such, the Commission believes that the CMSP Position Report and CMSP Information would assist CMSPs in providing collateral management services, and thereby, promote the prompt and accurate clearance and settlement of those securities transactions. Fourth, as described above, the proposed rule change would allow a CMSP to instruct DTC to Deliver, Pledge, or Release securities credited to a CMSP Account, on behalf of a Participant or Pledgee. In doing so, the proposed rule change should help reduce the number of actions that a Participant or Pledgee that uses a CMSP would need to take in order to effect the settlement of collateral transactions at DTC. The Commission believes that the proposal would thereby help add efficiency to the clearance and settlement process by providing straight-through submission and processing of settlement instructions by a CMSP, without further actions by the Participant or Pledgee. As such, the proposed CMSP Instructions would help promote the prompt and accurate clearance and settlement of securities transactions. Fifth, as described above, the proposal would make ministerial changes to Rule 35 to conform the existing language in Rule 35 to the proposed changes. The proposal would also make various stylistic edits to the rule text. These changes are designed to help ensure that the final rule text is coherent and all cross-references within the rule text are current. The Commission believes the ministerial and stylistic changes thereby would help Participants and Pledgees to better understand their rights and obligations with respect to the collateral management services provide under Rule 35. Therefore, the changes would help promote the prompt and accurate clearance and settlement of such transactions. As each of the aforementioned changes is designed to promote the prompt and accurate clearance and settlement of securities transactions, the Commission finds that the proposal is consistent with the requirements Section 17A(b)(3)(F). B. Consistency With Rule 17Ad-22(e)(21) Rule 17Ad-22(e)(21) promulgated under the Act requires, inter alia, a covered clearing agency \65\ to establish, implement, maintain and enforce written policies and procedures reasonably designed to be efficient and effective in meeting the requirements of its participants and the markets it serves.\66\ --------------------------------------------------------------------------- \65\ A ``covered clearing agency'' means, among other things, a clearing agency registered with the Commission under Section 17A of the Exchange Act (15 U.S.C. 78q-1 et seq.) that is designated systemically important by the Financial Stability Oversight Counsel (``FSOC'') pursuant to the Payment, Clearing, and Settlement Supervision Act of 2010 (12 U.S.C. 5461 et seq.). See 17 CFR 240.17Ad-22(a)(5)-(6). On July 18, 2012, FSOC designated DTC as systemically important. U.S. Department of the Treasury, ``FSOC Makes First Designations in Effort to Protect Against Future Financial Crises,'' available at https://www.treasury.gov/press-center/press-releases/Pages/tg1645.asp. Therefore, DTC is a covered clearing agency. \66\ 17 CFR 240.17Ad-22(e)(21). --------------------------------------------------------------------------- As described above, the proposal would amend Rule 35 to, generally, (i) broaden what entities may serve as a CMSP, (ii) allow Participants and Pledgees to utilize the services offered by Rule 35, (iii) and permit Participants and Pledgees to designate one or more CMSPs, with respect to a CMSP Account, to provide CMSP Instructions, as well as receive CMSP Information and CMSP Position Reports. With these proposed changes, the Commission believes that the proposal would grant both Participants and Pledgees the flexibility to establish and structure their respective CMSP Accounts, including the eligible CMSP that would service the accounts, in a manner that is most effective and efficient for the collateral management needs of that Participant or Pledgee and for the specifications of its designated CMSP(s). The proposed rule change also would make ministerial revisions and stylistic edits to Rule 35, as described above. These changes are designed to help Participants and Pledgees better understand their rights and obligations with respect to the services offered under Rule 35. By helping Participants and Pledgees better understand their rights and obligations with respect to Rule 35, the Commission believes that the proposed changes are designed to be efficient and effective in meeting the requirements of Participants and Pledgees that take advantage of DTC's collateral management services under Rule 35. [[Page 44381]] Therefore, the Commission finds that the proposal is designed to be efficient and effective in meeting the requirements of Participants and Pledgees, consistent with Rule 17Ad-22(e)(21) under the Act. III. Conclusion On the basis of the foregoing, the Commission finds that the proposal is consistent with the requirements of the Act, in particular the requirements of Section 17A of the Act \67\ and the rules and regulations thereunder. --------------------------------------------------------------------------- \67\ 15 U.S.C. 78q-1. --------------------------------------------------------------------------- It is therefore ordered, pursuant to Section 19(b)(2) of the Act, that proposed rule change SR-DTC-2018-006 be, and hereby is, approved.\68\ --------------------------------------------------------------------------- \68\ In approving the proposed rule change, the Commission considered the proposal's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\69\ --------------------------------------------------------------------------- \69\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2018-18784 Filed 8-29-18; 8:45 am] BILLING CODE 8011-01-P
![Federal Register / Vol. 83, No. 169 / Thursday, August 30, 2018 / Notices 44377
For the Commission, by the Division of (‘‘DEGCL’’) 6 to receive from DTC (i) a or (ii) is organized in a country other
Trading and Markets, pursuant to delegated CMS report that provides information than the United States, is regulated by
authority.8 regarding securities credited to the CMS a financial regulatory authority in the
Eduardo A. Aleman, Sub-Account of such Participant at the country in which it is organized, and
Assistant Secretary. time of the report (‘‘CMS Report’’), and demonstrates that it has notified the
[FR Doc. 2018–18826 Filed 8–29–18; 8:45 am] (ii) CMS delivery information that Commission in writing of its intention
BILLING CODE 8011–01–P provides real-time information to operate under Rule 35; 12 and (3) the
regarding any delivery or pledge from, entity establishes a connection to DTC,
or delivery or release to, the CMS Sub- in accordance with the reasonable
SECURITIES AND EXCHANGE Account (‘‘CMS Delivery requirements of DTC, in order to be able
COMMISSION Information’’).7 to receive position and transaction
[Release No. 34–83940; File No. SR–DTC– B. The Proposed Rule Change information and to submit instructions
2018–006] to DTC in accordance with the DTC
DTC proposes five changes to Rule 35: Rules and Procedures.13
Self-Regulatory Organizations; The (1) Adding the term ‘‘CMSP’’ (i.e., a
CMS provider) and its associated As proposed, DTC may decline to
Depository Trust Company; Order
function; (2) adding the term ‘‘CMSP accept an entity as a CMSP if it would
Granting Approval of Proposed Rule
Accounts’’ and its associated function; present material risk to DTC, its
Change To Amend Rule 35 To Provide
(3) adding the term ‘‘CMSP Reports’’ Participants and Pledgees, or impose
for Designated Accounts for Use With
and its associated function; (4) material costs to DTC.14 DTC states that
Designated Collateral Management
Service Providers authorizing a CMSP to submit CMSP some examples of circumstances in
instructions (‘‘CMSP Instructions’’) on which DTC might reject an applicant as
August 24, 2018. behalf of a Participant or a Pledgee of a CMSP include when DTC reasonably
On July 9, 2018, The Depository Trust DTC (‘‘Pledgee’’); and (5) making believes that acceptance of the applicant
Company (‘‘DTC’’) filed with the ministerial changes to conform with the as a CMSP would (i) subject DTC to
Securities and Exchange Commission proposed changes, as well as making additional legal or regulatory regimes, to
(‘‘Commission’’) proposed rule change stylistic edits.8 Each of these proposed which it is not otherwise subject; (ii)
SR–DTC–2018–006 pursuant to Section changes is described below. expose DTC to additional technology
19(b)(1) of the Securities Exchange Act risk; or (iii) cause DTC to be in violation
of 1934 (‘‘Act’’) 1 and Rule 19b–4 1. CMSP of applicable law or regulation.15
thereunder.2 The proposed rule change The proposal would add to Rule 35
was published for comment in the the term and function of a CMSP, which 2. CMSP Account
Federal Register on July 24, 2018.3 The a Participant or Pledgee could then The proposed rule change would add
Commission did not receive any designate to act on its behalf under the the term and function of a ‘‘CMSP
comment letters on the proposed rule rule, pursuant to the proposed changes.9 Account’’ to Rule 35.16 Currently, Rule
change. For the reasons discussed The term CMSP would replace the 35 requires a Participant looking to
below, the Commission approves the existing, singular designation of DEGCL utilize the services offered through Rule
proposed rule change. to act under Rule 35 as a collateral 35 to designate an account for such
I. Description of the Proposed Rule management provider.10 A partnership,
Change corporation, or other organization or 12 DTC states that in order to protect DTC, its
entity could become a CMSP, under the Participants and Pledgees, a CMSP that wishes to
The proposed rule change would proposed changes to Rule 35, if it act under the proposed changes to Rule 35 would
amend the Rules, By-Laws and satisfies three proposed criteria: (1) One need to be subject to regulatory oversight
Organization Certificate of The or more Participants or Pledgees comparable to a Participant, as provided in
Depository Trust Company (‘‘DTC proposed Section 2(b)(i) of Rule 35, or, if the entity
designate the entity as a CMSP for is organized in a country other than the United
Rules’’) 4 to revise DTC’s current Rule purposes of Rule 35; (2) the entity (i) States (a ‘‘non-U.S. entity’’), it would need to be
35—CMS Reporting (‘‘Rule 35’’). satisfies at least one of the qualifications regulated by a financial regulatory authority in the
country in which it is organized, as provided in
A. Background set forth in Section 1(a)–(h) of Rule 3 11 proposed Section 2(b)(ii) of Rule 35. Notice, 83 FR
Currently, Rule 35 provides that a at 35045. Further, the proposed rule change would
6 DEGCL is a joint venture of The Depository
require that, in order to be eligible to become a
Participant of DTC (‘‘Participant’’) may Trust & Clearing Corporation, the corporate parent CMSP, the non-U.S. entity must notify the
establish a collateral management of DTC, and Euroclear S.A./N.V. and was formed for Commission in writing of its intention to operate
service (‘‘CMS’’) 5 sub-account (‘‘CMS the purpose of offering global information, record under Rule 35, as modified by the proposed
Sub-Account’’), which authorizes DTCC keeping, and processing services for derivatives changes. Id. While DTC reserves the right to request
collateral transactions and other types of financing documentation and/or information relating to a
Euroclear Global Collateral Ltd. transactions. DEGCL offers service options for the CMSP’s compliance with the requirements of
selection of collateral to satisfy the collateral proposed Section 2 of Rule 35, it would be the sole
8 17 CFR 200.30–3(a)(12). obligations of its users (‘‘DEGCL CMS’’). See responsibility of the Participant or Pledgee to
1 15 U.S.C. 78s(b)(1). Securities Exchange Act Release No. 80280 (March evaluate and choose an appropriate CMSP that, at
2 17 CFR 240.19b–4. 20, 2017), 82 FR 15081 (March 24, 2017) (SR–DTC– a minimum, satisfies the requirements. Id. Under
3 See Securities Exchange Act Release No.83667 2017–001) (‘‘CMS Order’’) (providing additional proposed Section 2 of Rule 35, the designating
(July 18, 2018), 83 FR 35044 (July 24, 2018) (SR– information on DEGCL and DEGCL CMS). One Participant or Pledgee would remain liable as
DTC–2018–006) (‘‘Notice’’). option relates exclusively to Securities held at DTC, principal for the actions of its designated CMSP(s)
4 Available at http://www.dtcc.com/legal/rules- and is dependent on Rule 35. Id. on its behalf, and would indemnify DTC for any
7 CMS Order, 82 FR at 21838. loss, liability, or expense as a result of any claim
amozie on DSK3GDR082PROD with NOTICES1
and-procedures.aspx. Each capitalized term not
otherwise defined herein has its respective meaning
8 Notice, 83 FR at 35044–45. arising from (i) any act or omission of the CMSP,
as set forth in the DTC Rules. 9 Notice, 83 FR at 35045. (ii) the provision of CMSP Reports to the CMSP by
5 Collateral management generally involves 10 Id. DTC, or (iii) DTC’s compliance with instructions of
the CMSP. Id.
calculating collateral requirements and facilitating 11 Sections 1(a)–(h) of Rule 3 provide the
13 Id.
the transfer of collateral between counterparties. qualifications for a partnership, corporation or other
14 Id.
See Securities Exchange Act Release No. 64796 organization or entity to be eligible to become a
15 Id.
(July 1, 2011), 76 FR 39963, 39964 (July 7, 2011) Participant. See DTC Rules, Rule 3, Sections 1(a)–
(S7–28–11). (h), supra note 4. 16 Id.
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![Federal Register / Vol. 83, No. 169 / Thursday, August 30, 2018 / Notices 44381
Therefore, the Commission finds that published for comment in the Federal filed on December 18, 2017.8 On July 6,
the proposal is designed to be efficient Register on January 30, 2018.4 In that 2018, the Commission received a
and effective in meeting the publication, the Commission also response to its request for additional
requirements of Participants and extended the review period of the information in consideration of the
Pledgees, consistent with Rule 17Ad– advance notice for an additional 60 advance notice, which, in turn, added a
22(e)(21) under the Act. days, pursuant to Section 806(e)(1)(H) of further 60-days to the review period
the Clearing Supervision Act.5 On April pursuant to Section 806(e)(1)(E) and (G)
III. Conclusion
10, 2018, the Commission required of the Clearing Supervision Act.9 The
On the basis of the foregoing, the additional information from DTC Commission did not receive any
Commission finds that the proposal is pursuant to Section 806(e)(1)(D) of the comments. This publication serves as
consistent with the requirements of the Clearing Supervision Act,6 which tolled notice that the Commission does not
Act, in particular the requirements of the Commission’s period of review of object to the proposed changes set forth
Section 17A of the Act 67 and the rules the advance notice until 60 days from in the advance notice, as modified by
and regulations thereunder. the date the information required by the Amendment No. 1 (hereinafter,
It is therefore ordered, pursuant to Commission was received by the ‘‘Advance Notice’’).
Section 19(b)(2) of the Act, that Commission.7 On June 28, 2018, DTC
proposed rule change SR–DTC–2018– I. Description of the Advance Notice
filed Amendment No. 1 to the advance
006 be, and hereby is, approved.68 notice to amend and replace in its In the Advance Notice, DTC proposes
For the Commission, by the Division of entirety the advance notice as originally to (1) adopt an R&W Plan; and (2)
Trading and Markets, pursuant to delegated amend the Rules, By-Laws and
authority.69 8, 2018. Securities Exchange Act Release No. 82432 Organization Certificate of DTC
Eduardo A. Aleman, (January 2, 2018), 83 FR 884 (January 8, 2018) (SR– (‘‘Rules’’) 10 to adopt Rule 32(A) (Wind-
DTC–2017–021). On February 8, 2018, the down of the Corporation) and Rule 38
Assistant Secretary. Commission designated a longer period within
[FR Doc. 2018–18784 Filed 8–29–18; 8:45 am] which to approve, disapprove, or institute (Market Disruption and Force Majeure)
proceedings to determine whether to approve or (each proposed Rule 32(A) and
BILLING CODE 8011–01–P
disapprove the Proposed Rule Change. Securities proposed Rule 38, a ‘‘Proposed Rule’’
Exchange Act Release No. 82669 (February 8, 2018), and, collectively, the ‘‘Proposed
83 FR 6653 (February 14, 2018) (SR–DTC–2017–
SECURITIES AND EXCHANGE 021, SR–FICC–2017–021, SR–NSCC–2017–017). On Rules’’).
COMMISSION March 20, 2018, the Commission instituted DTC states that the R&W Plan would
proceedings to determine whether to approve or be used by the Board of Directors of
[Release No. 34–83953; File No. SR–DTC– disapprove the Proposed Rule Change. Securities DTC (‘‘Board’’) and DTC’s management
2017–803] Exchange Act Release No. 82912 (March 20, 2018),
83 FR 12999 (March 26, 2018) (SR–DTC–2017–021). in the event DTC encounters scenarios
On June 25, 2018, the Commission designated a that could potentially prevent it from
Self-Regulatory Organizations; The longer period for Commission action on the being able to provide its critical services
Depository Trust Company; Notice of proceedings to determine whether to approve or as a going concern.
No Objection to an Advance Notice, as disapprove the Proposed Rule Change. Securities
DTC states that the Proposed Rules
Modified by Amendment No. 1, To Exchange Act Release No. 83509 (June 25, 2018), 83
FR 30785 (June 29, 2018) (SR–DTC–2017–021, SR– are designed to (1) facilitate the
Adopt a Recovery & Wind-Down Plan FICC–2017–021, SR–NSCC–2017–017). On June 28, implementation of the R&W Plan when
and Related Rules 2018, DTC filed Amendment No. 1 to the Proposed necessary and, in particular, allow DTC
Rule Change. Securities Exchange Act Release No.
August 27, 2018. 83628 (July 13, 2018), 83 FR 34263 (July 19, 2018) to effectuate its strategy for winding
On December 18, 2017, The (SR–DTC–2017–021). DTC submitted a courtesy down and transferring its business; (2)
Depository Trust Company (‘‘DTC’’) copy of Amendment No. 1 to the Proposed Rule provide Participants with transparency
Change through the Commission’s electronic public around critical provisions of the R&W
filed with the Securities and Exchange comment letter mechanism. Accordingly,
Commission (‘‘Commission’’) advance Amendment No. 1 to the Proposed Rule Change has Plan that relate to their rights,
notice SR–DTC–2017–803 pursuant to been publicly available on the Commission’s responsibilities and obligations; and (3)
Section 806(e)(1) of Title VIII of the website at https://www.sec.gov/rules/sro/dtc.htm provide DTC with the legal basis to
since June 29, 2018. The Commission did not implement those provisions of the R&W
Dodd-Frank Wall Street Reform and receive any comments. The proposal, as set forth in
Consumer Protection Act entitled the both the advance notice and the Proposed Rule Plan when necessary.
Payment, Clearing, and Settlement Change, each as modified by Amendments No. 1, A. DTC R&W Plan
Supervision Act of 2010 (‘‘Clearing shall not take effect until all required regulatory
Supervision Act’’) 1 and Rule 19b– actions are completed. The R&W Plan would be structured to
4 Securities Exchange Act Release No. 82579
4(n)(1)(i) under the Securities Exchange provide a roadmap, define the strategy,
(January 24, 2018), 83 FR 4310 (January 30, 2018)
Act of 1934 (‘‘Act’’) 2 to adopt a recovery (SR–DTC–2017–803) (‘‘Notice’’).
and identify the tools available to DTC
and wind-down plan (‘‘R&W Plan’’) and 5 Pursuant to Section 806(e)(1)(H) of the Clearing to either (i) recover, in the event it
related rules.3 The advance notice was Supervision Act, the Commission may extend the
review period of an advance notice for an 8 Securities Exchange Act Release No. 83743 (July
67 15
additional 60 days, if the changes proposed in the 31, 2018), 83 FR 38344 (August 6, 2018) (SR–DTC–
U.S.C. 78q–1. advance notice raise novel or complex issues, 2017–803). DTC submitted a courtesy copy of
68 In approving the proposed rule change, the subject to the Commission providing the clearing Amendment No. 1 to the advance notice through
Commission considered the proposal’s impact on agency with prompt written notice of the extension. the Commission’s electronic public comment letter
efficiency, competition, and capital formation. 15 12 U.S.C. 5465(e)(1)(H). The Commission found that mechanism. Accordingly, Amendment No. 1 to the
U.S.C. 78c(f). the advance notice raised novel and complex issues advance notice has been publicly available on the
69 17 CFR 200.30–3(a)(12).
and, accordingly, extended the review period of the Commission’s website at http://www.sec.gov/rules/
amozie on DSK3GDR082PROD with NOTICES1
1 12 U.S.C. 5465(e)(1). advance notice for an additional 60 days until April sro/dtc-an.shtml since June 29, 2018.
2 17 CFR 240.19b–4(n)(1)(i). 17, 2018. See Notice, supra note 4. 9 12 U.S.C. 5465(e)(1)(E) and (G); see
3 On December 18, 2017, DTC filed the advance 6 12 U.S.C. 5465(e)(1)(D). Memorandum from the Office of Clearance and
notice as proposed rule change SR–DTC–2017–021 7 See 12 U.S.C. 5465(e)(1)(E)(ii) and (G)(ii); see Settlement Supervision, Division of Trading and
with the Commission pursuant to Section 19(b)(1) Memorandum from the Office of Clearance and Markets, titled ‘‘Response to the Commission’s
of the Act and Rule 19b–4 thereunder (‘‘Proposed Settlement Supervision, Division of Trading and Request for Additional Information,’’ available at
Rule Change’’). 15 U.S.C. 78s(b)(1) and 17 CFR Markets, titled ‘‘Commission’s Request for http://www.sec.gov/rules/sro/dtc-an.shtml.
240.19b–4, respectively. The Proposed Rule Change Additional Information,’’ available at http:// 10 Capitalized terms used herein and not
was published in the Federal Register on January www.sec.gov/rules/sro/dtc-an.shtml. otherwise defined herein are defined in the Rules.
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Document Created: 2018-08-30 01:20:43
Document Modified: 2018-08-30 01:20:43
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Notices | |
| FR Citation | 83 FR 44377 |
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