[Federal Register Volume 78, Number 3 (Friday, January 4, 2013)]
[Notices]
[Pages 795-797]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-31669]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68548; File No. SR-DTC-2012-10]
Self-Regulatory Organizations; The Depository Trust Company;
Notice of Filing of Proposed Rule Change To Reduce Liquidity Risk
Relating to Its Processing of Maturity and Income Presentments and
Issuances of Money Market Instruments
December 28, 2012.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on December 17, 2012, The Depository Trust Company (``DTC'') filed with
the Securities and Exchange Commission (``Commission'') the proposed
rule change described in Items I, II and III below, which Items have
been prepared primarily by DTC. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
DTC is proposing to change the current Largest Provisional Net
Credit (``LPNC'') risk management control in order to increase
withholding from one to two largest provisional credits (on an acronym
\3\ basis). DTC is also proposing to modify its Rules as they relate to
the Issuing/Paying Agent's (``IPA's'') refusal to pay process. DTC is
proposing not to permit reversal of a transaction when issuances of
Money Market Instruments (``MMIs'') in an acronym exceed, in dollar
value, the maturity or income presentments (``Maturity Obligations'')
of MMIs in the same acronym on the same day. As a result, at the point
in time when issuances of MMIs in an acronym exceed, in dollar value,
the Maturity Obligations of the MMIs in the same acronym on that day,
DTC will remove the LPNC control with respect to the affected acronym.
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\3\ DTC employs a four-character acronym to designate an
issuer's Money Market Instrument program. An issuer can have
multiple acronyms. The Issuing/Paying Agent's bank uses the
acronym(s) when submitting an instruction for a given issuer's Money
Market Instrument securities.
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II. Clearing Agency's Statement of Purpose of, and Statutory Basis for,
the Proposed Rule Change
In its filing with the Commission, DTC included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. DTC has prepared summaries, set forth in sections (A),
(B), and (C) below, of the most significant aspects of such
statements.\4\
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\4\ The Commission has modified the text of the summaries
prepared by DTC.
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(A) Self-Regulatory Organization's Statement of Purpose of, and
Statutory Basis for, the Proposed Rule Change
MMI presentment processing is initiated automatically by DTC each
morning for MMIs maturing that day. The automatic process
electronically sweeps all maturing positions of MMI
[[Page 796]]
CUSIPs from DTC Participant accounts and creates the Maturity
Obligations. The matured MMIs are, subject to DTC Rules, delivered to
the applicable IPA, a DTC Participant, and DTC debits the IPA's account
for the amount of the Maturity Obligations. In accordance with DTC
Rules, payment will be due from the IPA for net settlement to the
extent, if any, that the IPA has a net debit balance in its settlement
account at end-of-day.
Without regard to DTC net settlement, MMI issuers and IPAs commonly
view the primary source of funding of payments for Maturity Obligations
of MMIs as flowing from new issuances of MMIs in the same acronym by
that issuer on that day. In a situation where those new issuances
exceed the Maturity Obligations, the issuer would have no net funds
payment due to the IPA on that day. However, because Maturity
Obligations of MMIs are processed automatically at DTC, IPAs currently
may nevertheless refuse to pay for all of an issuer's maturities. An
IPA that refuses payment on an MMI must communicate its intention to
DTC using the DTC Participant Terminal/Browser Service (``PTS/PBS'')
MMRP function. This communication is referred to as an Issuer Failure/
Refusal to Pay (``RTP'') and it allows the Paying Agent to enter a
refusal to pay instruction for a particular issuer acronym up to 3:00
p.m. Eastern Time (``ET'') on the date of the affected maturity or
income presentment. Such an instruction will cause DTC, pursuant to its
Rules, to reverse all transactions related to any new issuances in that
issuer's acronym, including the Maturity Obligations, posing a
potential for systemic risk since the reversals may override DTC's risk
management controls (e.g., collateral monitor \5\ and net debit cap
\6\).
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\5\ DTC tracks collateral in a Participant's account through the
Collateral Monitor (``CM''). At all times, the CM reflects the
amount by which the collateral value in the account exceeds the net
debit balance in the account. When processing a transaction, DTC
verifies that the CM of each of the deliverer and receiver will not
become negative when the transaction is processed. If the
transaction would cause either party to have a negative CM, the
transaction will recycle until the deficient account has sufficient
collateral to proceed or until the applicable cutoff occurs.
\6\ The net debit cap control is designed so that DTC may
complete settlement, even if a Participant fails to settle. Before
completing a transaction in which a Participant is the receiver, DTC
calculates the effect the transaction would have on such
Participant's account, and determines whether any resulting net
debit balance would exceed the Participant's net debit cap. Any
transaction that would cause the net debit balance to exceed the net
debit cap is placed on a pending (recycling) queue until the net
debit cap will not be exceeded by processing the transaction.
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To mitigate the risks associated with an RTP, DTC employs the LPNC
risk management control. On each processing day, DTC withholds intraday
credit from each MMI Participant for the largest credit with respect to
an issuer's acronym, for purposes of calculating the Participant's net
settlement balance and collateral monitor. As such, this single largest
credit is provisional and is not included in the calculation of the
Participant's collateral monitor or in the settlement balance measured
against its net debit cap. The LPNC control protects DTC against (i)
either the single largest issuer failure on a business day, or (ii)
multiple failures on a business day that, taken together, do not exceed
the largest provisional net credit.
Maturity payment procedures were designed to limit credit,
liquidity, and operational risk for DTC and Participants in the MMI
program. In an effort to further mitigate these risks, DTC is proposing
the following changes to current processing associated with (1) the
LPNC control and (2) limiting intraday MMI reversals under specified
conditions:
1. Increase Withholding From one to two LPNCs
DTC is proposing to change the current LPNC risk management control
in order to increase withholding from one to two largest provisional
credits (on an acronym basis). DTC believes this will provide increased
risk protection in the event of transaction reversals due to multiple
issuer defaults or a single issuer default with two or more MMI
programs.
DTC has conducted a simulation analysis to measure the impact to
IPAs and custodians/dealers of an increase in LPNC controls from one to
two on settlement blockage \7\ intraday during peak processing periods.
DTC analyzed the blockage level for both the IPAs and custodians/
dealers as separate segments since each react to the additional
blockage in different ways. DTC believes the results of the simulation
analysis indicated that there will be no material change in transaction
blockage.
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\7\ Settlement blockage refers to transactions that cannot be
completed due to a receiver's net debit cap or collateral monitor
controls.
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2. Eliminate Intraday Reversals When MMI Issuances Exceed Maturity
Obligations
DTC is also proposing to modify its Rules as they relate to the
refusal to pay process. As planned, DTC will not permit reversal of a
transaction when issuances of MMIs in an acronym exceed, in dollar
value, the Maturity Obligations of MMIs in the same acronym on the same
day. In such instances, DTC will not permit reversal of the
transactions because the IPA would have no reason to exercise the
refusal to pay for that acronym on that settlement day. As a result, at
the point in time when issuances of MMIs in an acronym exceed, in
dollar value, the Maturity Obligations of the MMIs in the same acronym
on that day, DTC will remove the LPNC control with respect to the
affected acronym.
DTC believes the proposed changes will provide additional risk
protection to DTC and the financial system as a whole. DTC has
discussed this proposal with various industry groups, including the
Participants that transact in MMIs, and DTC received no objections to
the proposal. The Participants understand that the elimination of
intraday reversals when issuances exceed Maturity Obligations will
result in no material change in transaction blockage.
DTC believes the proposed changes should mitigate risk associated
with MMI transaction reversals due to an IPA refusal to pay
instruction. Additionally, DTC believes the proposed changes should
promote settlement finality by precluding reversals for those
issuances. DTC believes the proposed rule change is consistent with the
requirements of the Act, specifically Section 17A(b)(3)(F),\8\ and the
rules and regulations thereunder because the proposed changes should
facilitate the prompt and accurate clearance and settlement of
securities transactions by promoting efficiency in and finality of
settlement.
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\8\ 15 U.S.C. 78q-1(b)(3)(F).
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(B) Self-Regulatory Organization's Statement on Burden on Competition
DTC does not believe that the proposed rule change will have any
impact, or impose any burden, on competition.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants, or Others
The subject proposal regarding MMIs was developed in consultation
with various industry organizations. Written comments relating to the
proposed rule change have not yet been solicited or received. DTC will
notify the Commission of any written comments received by DTC.
[[Page 797]]
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove such proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-DTC-2012-10 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-DTC-2012-10. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such filings also will be available
for inspection and copying at the principal office of DTC and on DTC's
Web site at http://dtcc.com/downloads/legal/rule_filings/2012/dtc/SR-DTC-2012-10.pdf. All comments received will be posted without change;
the Commission does not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File Number SR-DTC-
2012-10 and should be submitted on or before January 25, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\9\
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\9\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012-31669 Filed 1-3-13; 8:45 am]
BILLING CODE 8011-01-P