[Federal Register Volume 78, Number 41 (Friday, March 1, 2013)]
[Notices]
[Pages 13924-13925]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-04750]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68983; File No. SR-DTC-2012-10]
Self-Regulatory Organizations; The Depository Trust Company;
Notice of Filing Amendment No. 2 and Order Approving Proposed Rule
Change, as Modified by Amendment No. 2, 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 17, 2012, The Depository Trust Company (``DTC'') filed
with the Securities and Exchange Commission (``Commission'') proposed
rule change SR-DTC-2012-10 (``Proposed Rule Change'') 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 in
the Federal Register on January 4, 2013.\3\ DTC filed Amendment No. 2
to the Proposed Rule Change on January 30, 2013.\4\ The Commission
extended the period of review of the Proposed Rule Change on February
5, 2013.\5\ The Commission received one comment on the Proposed Rule
Change.\6\ This publication serves as notice of filing Amendment No. 2
and order approving the Proposed Rule Change, as modified by Amendment
No. 2.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Release No. 34-68548 (Dec. 28, 2012), 78 FR 795 (Jan. 4,
2013). DTC also filed an advance notice pursuant to Section
806(e)(1) of the Payment, Clearing, and Settlement Supervision Act
of 2010 relating to these changes. Release No. 34-68690 (Jan. 18,
2013), 78 FR 5516 (Jan. 25, 2013).
\4\ DTC filed Amendment No. 1 to the Proposed Rule Change on
January 29, 2013, and withdrew it because of technical errors. DTC
filed Amendment No. 2 to: (i) Correct the technical errors in
Amendment No. 1 and (ii) correct the text of DTC's Settlement
Service Guide related to the Proposed Rule Change by adding a
sentence to clarify the change as stated in the Proposed Rule Change
and correcting a grammatical error therein.
\5\ Release No. 34-68834 (Feb. 5, 2013), 78 FR 9762 (Feb. 11,
2013).
\6\ 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.
---------------------------------------------------------------------------
II. Analysis
A. Description of MMI Processing and Proposed Rule Change
DTC filed the Proposed Rule Change 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
[[Page 13925]]
Maturity Obligations.\7\ 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'') \8\ and net debit cap
(``Net Debit Cap,'' collectively with CM, ``Settlement Risk
Controls'').\9\
---------------------------------------------------------------------------
\7\ DTC guidelines suggest that issuers fund their net debit
obligations to the IPA by 1:00 p.m. ET to alleviate this credit
risk.
\8\ 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.
\9\ 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).
---------------------------------------------------------------------------
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
Section 17A(b)(3)(F) of the Act requires that, among other things,
``[t]he rules of the clearing agency are designed to promote the prompt
and accurate clearance and settlement of securities transactions and *
* * to assure the safeguarding of securities and funds which are in the
custody or control of the clearing agency or for which it is
responsible.'' \10\ 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 Agency
Standards,\11\ 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.\12\
---------------------------------------------------------------------------
\10\ 15 U.S.C. 78q-1(b)(3)(F).
\11\ Release No. 34-68080 (Oct. 22, 2012), 77 FR 66219 (Nov. 2,
2012).
\12\ Id. at 131-139.
---------------------------------------------------------------------------
Here, as described in detail above, DTC's proposed rule change to
increase the LPNC from one to two largest provisional credits should,
generally, help further safeguard the securities and settlement process
as a whole, and, more specifically, help DTC 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 the
prompt and accurate clearance and settlement of securities (i.e.,
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.
III. Conclusion
On the basis of the foregoing, the Commission finds the Proposed
Rule Change, as modified by Amendment No. 2, consistent with the
requirements of the Act, particularly with the requirements of Section
17A of the Act,\13\ and the rules and regulations thereunder.
---------------------------------------------------------------------------
\13\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\14\ that the proposed rule change SR-DTC-2012-10, as modified by
Amendment No. 2, be and hereby is APPROVED \15\ as of the date of this
order or the date of the ``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 [DTC's] Processing of Maturity and
Income Presentments and Issuances of Money Market Instruments,'' SR-
DTC-2012-810, whichever is later.
---------------------------------------------------------------------------
\14\ 15 U.S.C. 78s(b)(2).
\15\ 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.\16\
---------------------------------------------------------------------------
\16\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-04750 Filed 2-28-13; 8:45 am]
BILLING CODE 8011-01-P