[Federal Register Volume 78, Number 41 (Friday, March 1, 2013)]
[Notices]
[Pages 13917-13919]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-04749]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68982; File No. SR-DTC-2012-810]
Self-Regulatory Organizations; The Depository Trust Company;
Notice of Filing Amendment No. 1 and No Objection to Advance Notice
Filing, as Modified by Amendment No. 1, To Reduce Liquidity Risk
Relating to Its Processing of Maturity and Income Presentments and
Issuances of Money Market Instruments
February 25, 2013.
I. Introduction
On December 28, 2012, The Depository Trust Company (``DTC'') filed
with the Securities and Exchange Commission (``Commission'') advance
notice SR-DTC-2012-810 (``Advance Notice'') pursuant to Section 806(e)
of Title VIII of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (``Dodd-Frank Act''),\1\ entitled the Payment, Clearing,
and Settlement Supervision Act of 2010 (``Clearing Supervision Act'' or
``Title VIII'') and Rule 19b-4(n) of the Securities Exchange Act of
1934 (``Exchange Act''). The Advance Notice was published in the
Federal Register on January 18, 2013.\2\ DTC filed Amendment No. 1 to
the Advance Notice on January 30, 2013.\3\ The Commission received one
comment on the Advance Notice.\4\ This publication serves as notice of
filing Amendment No. 1 and of no objection to the Advance Notice, as
modified by Amendment No. 1.
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\1\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, 124 Stat. 1376 (2010).
\2\ Release No. 34-68690 (Jan. 18, 2013), 78 FR 5516 (Jan. 25,
2013). DTC also filed a proposed rule change under Section 19(b)(1)
of the Exchange Act relating to these changes. Release No. 34-68548
(Dec. 28, 2012), 78 FR 795 (Jan. 4, 2013). The Commission extended
the period of review of the proposed rule change on February 5,
2013. Release No. 34-68834 (Feb. 5, 2013), 78 FR 9762 (Feb. 11,
2013).
\3\ The Amendment revised the text of DTC's Settlement Service
Guide related to the Advance Notice by adding a sentence to clarify
the change as stated in the Advance Notice and correcting a
grammatical error.
\4\ See Comment from Karen Jackson dated December 30, 2012,
http://sec.gov/comments/sr-dtc-2012-10/dtc201210-1.htm. The comment
discusses the ability of individuals to withdraw money from money
market accounts, which is not implicated by the proposed rule
change.
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II. Analysis
A. Description of MMI Processing and Proposed Rule Change
DTC filed the Advance Notice to permit it to make rule changes
designed to reduce liquidity risk relating to DTC's processing of
maturity and income presentments (``Maturity Obligations'') and
issuances of money market instruments (``MMIs''), as discussed below.
MMIs are settled at DTC on a trade-for-trade basis. Issuers of MMIs
that are not direct members of DTC enlist banks (``Issuing/Paying
Agent'' or ``IPA'') to issue MMIs to broker-dealers, who in turn sell
the MMIs to MMI investors. Debt issuance instructions are transmitted
to DTC by the IPA, which triggers DTC crediting the IPA's DTC account
and creating a deliver order to the broker-dealers' accounts on behalf
of the investors.
Maturity Obligations are initiated automatically by DTC early each
morning for MMIs maturing that day. DTC debits the amount of the
Maturity Obligations to the appropriate IPA's account and credits the
same amount to the appropriate broker-dealer and custodian accounts.
The debits and credits are conditional until final settlement at the
end of the day. According to DTC, IPAs do not have a legal obligation
to honor maturing MMIs if they have not received funding from the
issuer.
According to DTC, the common source of funding for Maturity
Obligations is new issuances of MMIs in the same acronym by the same
issuer on the day the Maturity Obligations are due. In a situation
where new MMI issuances exceed the Maturity Obligations, the issuer
would have no net funds payment due to the IPA on that day. However,
because Maturity Obligations are processed and debited from IPA
accounts automatically, IPAs currently incur credit risk if the issuers
do not issue MMIs that exceed the
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Maturity Obligations.\5\ Because IPAs do not have a legal obligation to
honor maturing MMIs in the absence of funding from the issuer, IPAs may
communicate to DTC an Issuer Failure/Refusal to Pay (``RTP'') for any
issuer acronym up to 3:00 p.m. ET on the day of the affected Maturity
Obligation. Such an instruction causes DTC, pursuant to its Rules, to
reverse all transactions related to that issuer's acronym, including
Maturity Obligations and any new MMI issuances, posing a potential for
systemic risk since the reversals may override DTC's risk management
controls such as the Collateral Monitor (``CM'') \6\ and net debit cap
(``Net Debit Cap,'' collectively with CM, ``Settlement Risk
Controls'').\7\
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\5\ DTC guidelines suggest that issuers fund their net debit
obligations to the IPA by 1:00 p.m. ET to alleviate this credit
risk.
\6\ A DTC ``Participant'' is a regulated institution that is
eligible to use and uses DTC's services. See DTC Participant
Handbook (Sept. 2011). DTC tracks collateral in a Participant's DTC
account through the 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. See id.
\7\ 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. See
DTC Participant Handbook (Sept. 2011).
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DTC currently withholds intraday from each MMI member the largest
provisional net credit (``LPNC'') of a single issuer's acronym for
purposes of calculating the member's position in relation to the
Settlement Risk Controls. DTC believes that the LPNC control helps
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.
Recent market events have increased DTC's awareness of the
possibility of multiple simultaneous MMI issuer failures. Multiple
simultaneous MMI issuer failures may cause more IPAs on a given day to
communicate an RTP to DTC, which could increase the amount of the
reversal that could override the DTC Settlement Risk Controls. As a
result, DTC is increasing the LPNC withholding to the two largest net
credits (on an acronym basis). In order to alleviate any settlement
blockage that may occur as a result of withholding the two largest
LPNCs and to promote settlement finality, DTC will no longer process an
RTP initiated by an IPA that serves as both an issuing agent and a
paying agent in the same acronym on the same day when new MMI issuances
in an acronym exceed, in dollar value, the Maturity Obligations in the
same acronym on the same day and the receiving members' Settlement Risk
Controls permit completion of the transaction. As a result, DTC will
remove the LPNC withholding with respect to such acronyms at the point
in time when it eliminates the IPA's option to initiate an RTP.
B. Discussion
Although Title VIII does not specify a standard of review for an
Advance Notice, the stated purpose of Title VIII is instructive.\8\ The
stated purpose of Title VIII is to mitigate systemic risk in the
financial system and promote financial stability by, among other
things, promoting uniform risk management standards for systemically-
important financial market utilities (``FMUs'') \9\ and providing an
enhanced role for the Federal Reserve Board in the supervision of risk
management standards for systemically-important FMUs.\10\
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\8\ 12 U.S.C. 5461(b).
\9\ DTC was designated a systemically-important FMU on July 18,
2012, by the Financial Stability Oversight Council. Financial
Stability Oversight Council 2012 Annual Report, Appendix A, http://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf.
\10\ 12 U.S.C. 5461(b).
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Section 805(a)(2) of the Clearing Supervision Act \11\ authorizes
the Commission to prescribe risk management standards for the payment,
clearing, and settlement activities of designated clearing entities and
financial institutions engaged in designated activities for which it is
the supervisory agency or the appropriate financial regulator. Section
805(b) of the Clearing Supervision Act \12\ states that the objectives
and principles for the risk management standards prescribed under
Section 805(a) shall be to:
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\11\ 12 U.S.C. 5464(a)(2).
\12\ 12 U.S.C. 5464(b).
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Promote robust risk management;
Promote safety and soundness;
Reduce systemic risks; and
Support the stability of the broader financial system.
The Commission adopted risk management standards under Section
805(a)(2) of the Clearing Supervision Act on October 22, 2012
(``Clearing Agency Standards'').\13\ The Clearing Agency Standards
became effective on January 2, 2013 and require clearing agencies that
perform central counterparty services to establish, implement,
maintain, and enforce written policies and procedures that are
reasonably designed to meet certain minimum requirements for their
operations and risk management practices on an ongoing basis.\14\ As
such, it is appropriate for the Commission to review Advance Notices
against these risk management standards that the Commission promulgated
under Section 805(a) and the objectives and principles of these risk
management standards as described in Section 805(b).
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\13\ Release No. 34-68080 (Oct. 22, 2012), 77 FR 66219 (Nov. 2,
2012).
\14\ The Clearing Agency Standards are substantially similar to
the risk management standards established by the Board of Governors
governing the operations of designated FMUs that are not clearing
entities and financial institutions engaged in designated activities
for which the Commission or the Commodity Futures Trading Commission
is the Supervisory Agency. See Financial Market Utilities, 77 FR
45907 (Aug. 2, 2012).
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The proposal to increase the LPNC withholding from one to two on an
acronym basis is designed to further mitigate intraday credit risk
borne by DTC and its members during the time between the initiation of
Maturity Obligations and the MMI issuer funding for those Maturity
Obligations, typically by issuing new MMIs. DTC states that the
initiative for the proposal was a heightened awareness of the
possibility of multiple simultaneous MMI issuer failures. The proposal
to no longer process an RTP initiated by an IPA when new issuances in
an acronym exceed, in dollar value, the Maturity Obligations in the
same acronym on the same day is designed to promote settlement finality
and to alleviate the possibility of settlement blockage that may result
from DTC increasing the LPNC withholding from one to two. Consistent
with Section 805(a), the Commission believes these changes promote the
safety and soundness of the operations of DTC, reduce systemic risks
typically associated with MMI transactions, and support the stability
of the broader financial system by promoting settlement finality of MMI
transactions.
Furthermore, Commission Rules 17Ad-22(d)(11) regarding Default
Procedures and 17Ad-22(d)(12) regarding Timing of Settlement Finality,
both adopted as part of the Clearing
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Agency Standards,\15\ require that clearing agencies establish,
implement, maintain and enforce, written policies and procedures
reasonably designed to establish default procedures that ensure that
the clearing agency can take timely action to contain losses and
liquidity pressures and to continue meeting its obligations in the
event of a participant default, and require that intraday or real-time
finality be provided where necessary to reduce risks, respectively.\16\
Here, as described in detail above, DTC's proposed rule change to
increase the LPNC from one to two largest provisional credits should
help it better contain losses and liquidity pressures, yet continue to
meet its obligations; meanwhile, DTC's proposed rule change to no
longer process RTPs for an acronym when the described circumstances are
met and, then, remove the LPNC for the same acronym when an RTP is no
longer viable should improve settlement finality, thus reducing DTC's
risk. Since RTPs will no longer be processed when new issuances in an
acronym exceed Maturity Obligations in the same acronym in the same
day, removing the LPNC control in these cases should not increase DTC's
exposure to MMI issuer credit risk.
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\15\ Release No. 34-68080 (Oct. 22, 2012), 77 FR 66219 (Nov. 2,
2012).
\16\ Id. at 131-139.
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III. Conclusion
It is therefore noticed, pursuant to Section 806(e)(1)(I) of the
Clearing Supervision Act,\17\ that the Commission does not object to
the proposed rule change described in the Advance Notice, as modified
by Amendment No. 1, and that DTC be and hereby is authorized to
implement the proposed rule change as of the date of this notice or the
date of the ``Notice of Filing Amendment No. 2 and Order Approving
Proposed Rule Change, as Modified by Amendment No. 2, to Reduce
Liquidity Risk Relating to [DTC's] Processing of Maturity and Income
Presentments and Issuances of Money Market Instruments,'' SR-DTC-2012-
10, whichever is later.
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\17\ 12 U.S.C. 5465(e)(1)(I).
By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-04749 Filed 2-28-13; 8:45 am]
BILLING CODE 8011-01-P