[Federal Register Volume 78, Number 17 (Friday, January 25, 2013)]
[Notices]
[Pages 5516-5518]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-01484]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68690; File No. SR-DTC-2012-810]
Self-Regulatory Organizations; The Depository Trust Company;
Notice of Filing Advance Notice To Reduce Liquidity Risk Relating to
Its Processing of Maturity and Income Presentments and Issuances of
Money Market Instruments
January 18, 2013.
Pursuant to Section 806(e)(1) of the Payment, Clearing, and
Settlement Supervision Act of 2010 (``Clearing Supervision Act'') \1\
and Rule 19b-4(n)(1)(i) \2\ thereunder, notice is hereby given that on
December 28, 2012, The Depository Trust Company (``DTC'') filed with
the Securities and Exchange Commission (``Commission'') the advance
notice 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 advance notice from interested persons.
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\1\ 12 U.S.C. 5465(e)(1).
\2\ 17 CFR 240.19b-4(n)(i).
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I. Clearing Agency's Statement of the Terms of Substance of the Advance
Notice
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 process a reversal of a transaction initiated by an
IPA 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
[[Page 5517]]
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 Advance Notice
In its filing with the Commission, DTC included statements
concerning the purpose of and basis for the advance notice and
discussed any comments it received on the advance notice. 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) and (B)
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) Advance Notices Filed Pursuant to Section 806(e) of the Payment,
Clearing and Settlement Supervision Act
Description of 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 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
operationally have the ability 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 that
issuer's acronym, including Maturity Obligations and any new issuances,
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. DTC believes that the LPNC control will help
protect DTC against either (i) 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 settlement
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 process a reversal of
a transaction initiated by an IPA 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 process a
reversal of the transaction because the IPA would have no reason to
exercise the refusal to pay for that acronym on that settlement day. As
a result, because the LPNC control is designed to protect against
transaction reversals, 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 proposes not to apply the
LPNC control with respect to the affected acronym.
Anticipated Effect on and Management of Risk
DTC believes that the proposed changes will mitigate the systemic
risk associated with MMI transaction reversals due to an IPA refusal to
pay instruction by increasing withholding from one to two largest
provisional credits (on an acronym basis). DTC believes that 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. By
[[Page 5518]]
mitigating DTC's and the financial systems exposure to this systemic
risk, DTC believes that the proposed change will contribute to the goal
of financial stability in the event of a default, and is consistent
with the CPSS-IOSCO Recommendations for Securities Settlement Systems
\8\ applicable to DTC.
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\8\ Principles for Financial Market Infrastructures of the
Committee on Payment and Settlement Systems and the Technical
Committee of the International Organization of Securities
Commissions (``CPSS-IOSCO'') (April 2012), available at http://www.bis.org/publ/cpss101a.pdf.
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DTC has discussed this proposal with various industry groups,
including the Participants that transact in MMIs, none of whom
objected, according to DTC. According to DTC, the Participants
understand that the elimination of intraday reversals when issuances
exceed Maturity Obligations will result in no material change in
settlement blockage and will mitigate systemic risk as a whole. DTC
believes the proposed changes should promote settlement finality by
precluding reversals for those issuances.
(B) Clearing Agency's Statement on Comments on the Advance Notice
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 changes contained in the advance notice have not yet been
solicited or received. DTC will notify the Commission of any written
comments received by DTC.
III. Date of Effectiveness of the Advance Notice and Timing for
Commission Action
The clearing agency may implement the proposed change pursuant to
Section 806(e)(1)(G) of the Clearing Supervision Act \9\ if it has not
received an objection to the proposed change within 60 days of the
later of (i) the date that the Commission received the advance notice
or (ii) the date the Commission receives any further information it
requested for consideration of the notice. The clearing agency shall
not implement the proposed change if the Commission has any objection
to the proposed change.
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\9\ 12 U.S.C. 5465(e)(1)(G).
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The Commission may extend the period for review by an additional 60
days if the proposed change raises novel or complex issues, subject to
the Commission providing the clearing agency with prompt written notice
of the extension. A proposed change may be implemented in less than 60
days from the date of receipt of the advance notice, or the date the
Commission receives any further information it requested, if the
Commission notifies the clearing agency in writing that it does not
object to the proposed change and authorizes the clearing agency to
implement the proposed change on an earlier date, subject to any
conditions imposed by the Commission. The clearing agency shall post
notice on its Web site of proposed changes that are implemented.
The proposal shall not take effect until all regulatory actions
required with respect to the proposal are completed.\10\
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\10\ DTC also filed the proposals contained in this advance
notice as a proposed rule change under Section 19(b)(1) of the Act
and Rule 19b-4 thereunder. 15 U.S.C. 78s(b)(1); 17 CFR 240.19b-4.
Pursuant to Section 19(b)(2) of the Act, within 45 days of the date
of publication of the proposed rule change in the Federal Register
or within such longer period up to 90 days if the Commission
designates or the self-regulatory organization consents the
Commission will either: (i) By order approve or disapprove the
proposed rule change or (ii) institute proceedings to determine
whether the proposed rule change should be disapproved. 15 U.S.C.
78s(b)(2)(A). See Release No. 34-68548 (December 28, 2012), 78 FR
795 (January 4, 2013).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the advance
notice is consistent with the Clearing Supervision 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-2012-810 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-2012-810. 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 advance notice that are filed with the
Commission, and all written communications relating to the advance
notice 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/Advance_Notice_SR_2012_810.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-2012-810 and should be submitted on or before February 15, 2013.
By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-01484 Filed 1-24-13; 8:45 am]
BILLING CODE 8011-01-P